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

The Economic Times - - Smart -

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.

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