Q2FY24 Review: Hindalco: Strong Q2; going long on alumina

13 Nov 2023 , 02:26 PM

Hindalco posted strong Q2 India Ebitda of Rs25.7bn led by surprise RS6.5bn Ebitda for Cu business. Al Ebitda at Rs21.6bn benefited from 6% fall in CoP. Improved coal linkage supply seen in Q2 should reverse in Q3 leading to flat CoP QoQ. Planned 2mtpa (in 2 phases) alumina expansion is designed to leverage supply shortage in Middle East and low CoP backed by assured bauxite supply from OMC. Analysts of IIFL Capital Services upgrade FY24 Ebitda by 4% led by strong Novelis performance. Retain BUY. 

Copper business drives beat in Q2: 

Hindalco reported strong India business Ebitda of Rs25.7bn (up 4% QoQ) in Q2 led by 20% QoQ jump in Cu business Ebitda to Rs6.5bn. Cu volumes jumped 14% on normalisation of production and imports of cathode to leverage strong demand. Al business Ebitda stood at Rs21.6bn (up 7% QoQ) supported by ~6% drop in CoP and 16% QoQ jump in downstream Al volume to 94kt. Coal cost fell ~15% QoQ on higher materialisation of linkage coal and reduction in prices for other key RM. Q3 should see flat CoP QoQ (on higher coal cost, offset by lower other RM) while Cu business Ebitda should normalise to Rs5-5.5bn per quarter. 

Novelis – volume recovery drives profitability improvement: 

Novelis reported volumes of 933kt (up 6% QoQ) led by end of destocking cycle for beverage cans in Americas even as auto and aero demand remained strong. Volume recovery drove a sharp improvement in Ebitda/t to US$519 (vs US$479 QoQ). While Q3 would be weak (US$450-500/t) due to weak volumes (planned shutdown, seasonal impact), management maintained Q4 guidance of Ebitda/t at US$525. Strong pricing environment for can sheets and recovery of volumes should help increase profitability over medium term. 

New Alumina capex targeting Middle East market: 

Hindalco announced Rs60bn capex over 3yrs for a greenfield 1mtpa alumina refinery in Odisha as it secured long term bauxite supply from OMC. Phase 2 will have another Rs20bn capex for 1mtpa expansion. Sales would be to Middle East smelters through long term contracts linked to LME prices and should provide healthy IRR given the low CoP as per management. In near term Alumina sales from Utkal should ramp up as well post commissioning of 350kt expansion.