Street is Quick to Take Note of Hindalco’s Improved Prospects
US arm Novelis’ performance continues to improve, helped by lower input and interest cost; firming aluminium prices a welcome boost
ET Intelligence Group: Earnings prospects of Hindalco, the country’s largest aluminium producer, look brighter than before following consistent improvement in the performance of Novelis, its US subsidiary, and firm aluminium prices.
This promising future has prompted investors to make fresh purchases in its counter on Tuesday even though the overall mood on Dalal Street was sombre. Hindalco’s stock gained 3.3% on the BSE at the end of the day’s session while the benchmark S&P BSE Sensex lost 0.8%.
Novelis, which produces aluminium products, such as sheets and cans, reported 16% jump in revenue and 8% growth in operating profit before depreciation (EBIDTA) on year-on-year basis. EBIDTA was 6-8% higher than analysts’ expectations as pricing pres- sure in the beverage cans segment was offset by lower raw material cost and improved contribution by the higher margin auto sheets segment. Although the company does not share the exact segment-wise financial break-up, analysts believe that though the auto segment contributes just under one-fifth to revenue, its margin is at least twice that of the can segment, which contributes nearly two-third to revenue. As a result, EBIDTA per tonne for the company increased 4% to $365. Incidentally, EBIDTA per tonne is a key parameter used for the operating performance.
Further, the 23% year-on-year drop in the interest expense due to debt refinancing resulted in the fourfold jump in net profit at $101 million. The extent of free cash outflow (cash burn) reduced to $77 million from $146 million in the year-ago quarter.
Improving cash flow and expected drop in the FY18 debt-EBIDTA ratio to less than four has made the management to change its stance from being capex conservative to looking at new growth opportunities. “As more automakers turn to aluminium to produce the next generation vehicles, we are actively looking to increase capacity and reinforce our leadership position in this growth market,” said Steve Fisher, chief financial officer, Novelis. Buoyed by the improved performance, Hindalco’s stock closed at a six-year high of ₹ 235.1 on the BSE on Tuesday. At this price, the company’s enterprise value was 6.8 times FY18 expected EBITDA and 5.8 times considering FY19 estimates. The multiple may improve given better growth prospects.