Pick Of The Week: Buy This Multibagger Aditya Birla Group Stock, Brokerage Sees Robust Gains

Axis Securities in its pick of the week stock has placed a buy call on Hindalco Industries Limited, a large-cap Metal sector stock. The brokerage recommends buy the stock with a target price of Rs 502 apiece. The brokerage claims a potential upside of up to 10% considering the given target price and the current market price of the stock.

Hindalco Industries is the metals flagship company of Aditya Birla Group. It is the largest primary producers of aluminium in Asia. Hindalco operates under three segments - low-cost vertically integrated Aluminum segment (1.3mt), World's largest rolling and recycling Novelis operations (4mt rolling and 2.5mt recycling facility) and custom copper smelting (0.42mt copper cathodes capacity.

Stock Outlook & Returns

The share price of Hindalco Industries on NSE closed at Rs 460.15/share, gaining 0.74% as compared to its previous close. Its 52 week low is Rs 308.95 and 52 week high is Rs 636, respectively. It has a market capitalization of Rs Rs 1,03,403 crore.
 
 Over the past 1 month, the stock surged 4.91% whereas, in the past 3 months, it surged 11.65%. Over the past 1 year, it surged by 2.22%. In the last 3 years, it gave 112.74% multibagger returns. In the past 5 years, it gave 80.95% positive returns.

Investment Rationale

A. Costs peaking out at Indian Aluminum operations: Aluminum CoP increased by 20% QoQ in Q2FY23 due to higher energy costs. In H2FY23, the management expects ease in coal prices and supply and has guided on a 2-5% reduction in CoP in Q3FY23. Further reduction in Q4FY23 is possible.

B. Novelis' EBITDA (~+50% Group's EBITDA) is almost de-risked from the LME Aluminum volatility: Novelis's Long-term sustainable EBITDA/t guidance unchanged at $525/t. However, for H2FY23, citing higher energy/logistics costs, the company guided the near-term cost headwinds of $75-125/t on EBITDA/t from the $525/t level. However, we expect the EBITDA/t to inch up to $525/t at Novelis from end of FY23 onwards as price contracts get reset, ensuring pass-through of higher costs. Also, Novelis is hedged for about 80% of its energy costs for the remaining of FY23 and above 60% for FY24. 60% of Novelis business is from recession-resilient beverage cans.

C. Sustainable EBITDA from the copper conversion on improved Tc/Rc: The supply of copper concentrate is expected to increase with the onset of new mines. As a result, spot Tc/Rc is expected to remain elevated in H2FY23. Spot TC/RC has risen to USc21.5/lb from USc18.5/lb QoQ. On account of better Tc/Rc margin, copper EBITDA is expected to sustain in the range of Rs 450-500 Cr (quarterly run rate. Q2FY23: Rs 544 Cr).

D. Disciplined capital allocation approach: The management stated that they will pace the growth Capex with the cash flows to keep Net-debt/EBITDA within 2.5x at Novelis, whereas in India gross debt should not exceed the current level of Rs 14,000 Cr.

Brokerage Views

Axis Securities said, "We believe Hindalco to be a defensive play backed by stable cash flows and lower operational and financial leverage. Hindalco's Net Debt/EBITDA is at 1.47x well below the target of 2.0x. LME Aluminium is expected to find support from peaking of the US dollar and China easing its Zero Covid policy."

The brokerage added, "We recommend a BUY rating on the stock with a target price of Rs 502/share, implying an upside of 10% from the CMP."

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.