Hindalco dives 15% on upward revision in Novelis capex; here are fresh share price targets

Om Sharma
By Om Sharma 3 Min Read

FEBRUARY 13, 2024

Hindalco shares received attention from JM Financial, highlighting expectations of a substantial increase in capital expenditure (capex) which may lower the internal rate of return (IRR). However, the trajectory of earnings is anticipated to improve due to ongoing plant commissioning, enhanced recycling efforts, and a well-distributed capex strategy.

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Hindalco Industries Ltd witnessed a significant 15% decline in its shares during Tuesday’s trading session. This downturn followed Novelis’ announcement during its December quarter results, which revealed a 65% upward revision in the Bay Minette project’s capital expenditure, along with a projected one-year delay. Moreover, Novelis adjusted its return guidance from the project, lowering it from ‘mid-teens’ to ‘double digits’. These developments have raised concerns among investors regarding the project’s viability and potential impact on future earnings.

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Following recent developments, the stock experienced a substantial decline of 14.69%, reaching a low of Rs 496.80. Analysts, however, foresee potential upside from current levels. Kotak Institutional Equities noted that the company’s decision to increase the capex outlay for its North American greenfield expansion project by 65% to $4.1 billion, along with a one-year delay in the timeline to end-FY2027E, may impact its long-term growth and return prospects. Despite this, explicit earnings forecasts remain unaffected until FY2026E. JM Financial emphasized that while projected costs for the Bay Minette plant may escalate, the earnings trajectory could still benefit from plant commissioning, increased recycling, and evenly spread capex. This suggests potential for higher shipments and margins, maintaining the journey towards sustainable Ebitda per tonne of $525.

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Hindalco emerges as a top choice in the metal sector, with over 70% steady/strong Ebitda not tied to LME fluctuations, making it the preferred play, according to a brokerage firm. With a ‘Buy’ rating and a target price of Rs 610, it stands out. Axis Securities has further raised its target to Rs 660 from Rs 555, anticipating Ebitda to hit the $500 million milestone in Q4FY24. Additionally, the company’s full-year Capex guidance, now at the lower end of $1.4-1.6 billion, is expected to reduce the net leverage ratio to 2.5 times by the end of FY24, down from 2.7 times in Q3FY24, supported by robust cash flow in Q4FY24.

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