Hindalco: JM Financial stated that while there’s a considerable increase in capital expenditure (capex), it may lead to a decrease in the internal rate of return (IRR). However, they anticipate a positive impact on earnings trajectory, driven by plant commissioning, enhanced recycling efforts, and evenly distributed capex.
Shares of Hindalco Industries Ltd dropped by 15 percent in Tuesday’s trading session. This decline occurred as Novelis, during the announcement of its December quarter results, increased its Bay Minette project’s capital expenditure by 65 percent and indicated a one-year delay. Additionally, Novelis reduced its return guidance from the project, from ‘mid-teens’ to ‘double digits’.
After this development, the stock plummeted by 14.69 percent, reaching a low of Rs 496.80. Analysts’ projections for the stock indicate a potential upside from its current levels.
The company has increased the capital expenditure allocation for its primary growth initiative the greenfield expansion in North America by 65 percent, totaling $4.1 billion, and extended the timeline by one year to end FY2027E. While cost inflation and the delay do not directly affect our projected earnings until FY2026E, they do hinder the company’s growth, earnings, and return potential over a 5-year period,” stated Kotak Institutional Equities. The brokerage recommended a fair value of Rs 535 for the stock.
Hindalco plunges 15% on increased revision in Novelis capex; here are updated share price objectives
According to JM Financial, the considerable increase in projected costs for the Bay Minette plant is expected to lead to a lower internal rate of return (IRR). However, they anticipate that the earnings trajectory will benefit from monitoring plant commissioning, enhanced recycling efforts, and evenly distributed capital expenditure. This, in turn, is likely to result in higher shipments and margins, thereby maintaining its journey towards achieving sustainable EBITDA per tonne of $525.
The brokerage emphasized that Hindalco stands out as their top pick in the metal sector due to its robust EBITDA, with over 70 percent being non-LME linked. They maintain a ‘Buy’ rating on the stock and set a target of Rs 610.
Axis Securities has indeed raised its target for the stock to Rs 660 from Rs 555. They anticipate that EBITDA will reach the $500 million milestone in Q4FY24.
The full-year Capex guidance now ranges from $1.4 to $1.6 billion, adjusted from $1.6 to $1.8 billion in Q2FY24. The net leverage ratio is projected to decrease to 2.5 times by the end of FY24, compared to 2.7 times in Q3FY24. This reduction will be driven by robust cash flow in Q4FY24,” stated the source.
