Steam rises from olten aluminum as it cools inside ingot molds at the Alumetal Group Hungary Kft. aluminium processing plant in Komarom, Hungary. (Photographer: Akos Stiller/Bloomberg)

Hindalco Arm Aleris’ Operating Income Jumps The Most In Five Years

Aleris Corporation’s operating profit growth in 2018 rose to its highest in five years, helped by demand from automotive and aerospace industries.

Adjusted earnings before interest, tax, depreciation and amortisation jumped 37 percent year-on-year to $276 million in calendar year 2018, according to the Cleveland, Ohio-based company’s annual presentation. For the quarter ended December, adjusted Ebitda rose 64.86 percent on a yearly basis to $61 million. Net loss of the company acquired by Hindalco Industries Ltd. narrowed to $92 million in 2018 from $211 million a year earlier, mainly driven by record auto and aerospace shipments.

Aleris didn’t provide a forecast for the ongoing calendar year but Hindalco’s $360-million Ebitda guidance for 2020 suggests that it expects the growth to ease from the current level because of a higher base, pressure on aluminium spreads and an auto slowdown.

Given its 2018 performance, Aleris should be able to achieve its $360 million Ebitda guidance for 2020, which makes its acquisition value-accretive for Hindalco, according to Amit Dixit, research analyst and assistant vice president (institutional equities) at Edelweiss Securities. But Dixit expects the company’s growth in 2019 to “normalise” mainly due to compressed aluminium spreads—the difference between the cost of raw material and selling price.

Aluminium has been the worst-performing base metal on the London Metal Exchange in the past 12 months and so far this year, according to Bloomberg data.

Still, Aleris expects segment income and absolute adjusted Ebitda for 2019 to be higher than the previous year and hopes to generate positive cash flows. Higher global aerospace volume and increased focus on value-added automotive body sheet products and a stable housing industry condition in North America is expected to aid growth this year, according to Aleris’ presentation.

North America’s adjusted Ebitda, contributing more than half of its total operating income, rose 68 percent year-on-year in 2018. While the Europe division, with the second-highest weight, grew 0.8 percent, the Asia-Pacific region reported a 76 percent growth last year.

IIFL analyst Anupam Gupta, however, cited slower auto demand as a key risk to Aleris’ target. The brokerage downgraded Hindalco’s 2019-20 earnings estimates by 9 percent, factoring in current metal prices and exchange rate.

Twenty-five of the 30 analysts tracking Hindalco recommend a ‘Buy’, implying a potential upside of more than 35 percent, according to Bloomberg data.

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