Hindalco Q2 Review — Systematix Maintains 'Hold' Citing Strong India Show But Persistent Novelis Headwinds

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Systematix Report

We have revised Hindalco Industries Ltd.'s FY27 Ebitda estimates higher by 8%, based on a mix of assumptions pertaining to aluminium downstream margins, commodity price assumptions, partially offset by lower margins at Novelis.

We introduce FY28E estimates assuming LME aluminium sustains at $2,700/tonne. We expect Novelis’s Ebitda/tonne to gradually recover to $507/tonne, supported by its cost savings target of $125 million – $330 million over FY27-FY28.

We value Hindalco on SOTP basis, using segment-wise Ebitda estimates and assigning a multiple of five times each to Novelis and copper business segments, 5.5x to India upstream aluminium segment, and six times to the aluminium downstream segment.

Our valuation incorporates current net debt of Rs 414 billion, compared to ~Rs 343 billion at the end of the previous quarter.

We maintain Hold on Hindalco with a revised target price of Rs 840/share. We also provide a sensitivity table to LME aluminium prices.

Hindalco’s capacity expansion and growth story is supported by strong execution capabilities, value addition, and backward integration. However, strong India business performance continues to be offset by weakness at Novelis due to extraordinary events and negative trade tariff impact.

Upward revision in project costs as the company approaches peak capex year increases earnings susceptibility to price and demand volatility due to higher levels of debt.

Hindalco’s strong domestic execution and domestic portfolio offer resilience but lingering challenges at Novelis keep risk-reward balanced, in our view.

We expect elevated capex and higher leverage to restrict free cash generation with notable improvement in leverage only possible with timely project execution and margin recovery at Novelis. Maintain HOLD.

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