Why JPMorgan Sees A 70% Upside For Hindalco
JPMorgan sees a 70% potential upside for Hindalco Industries Ltd. in the next one-two years. The reasons are threefold.
1. Global growth story remains intact.
The most important driver for this scenario to play out would be sustained global demand growth for aluminum, the research firm said in a note. This would support elevated LME aluminum prices. Steady aluminum demand growth across the key product segments such as autos, cans and packaging should support elevated margin for Hindalco’s downstream subsidiary, Novelis Corp., and drive volume growth. For that steady downstream demand growth is necessary as that is what would drive Novelis’ Ebitda higher.
“Novelis has reported near $500/t adjusted Ebitda/t for the last two quarters, but we continue to sense a high degree of investor skepticism on how sustainable these margins are.”
2. Investment in high growth projects, combined with share buyback to lift its decade-low return-on-equity.
Hindalco’s Novelis acquisition and subsequent capex increase has not lifted RoEs materially, JPMorgan said. The Indian aluminium maker delivered more than 10% RoE only twice in the last 10 years (FY12 and FY18) and it was driven by high prices in LME.
3. Increase of exposure in cyclicals.
Since the global financial crisis, and disappointment on sustained global growth, investors have broadly shunned cyclicals, especially commodity cyclicals. Hindalco’s stock price up-move since April has broadly tracked earnings upgrades. Investors, JPMorgan said, continue to worry on how sustainable the current global growth uptrend is going to be, and hence if the stock price for Hindalco (and other commodity cyclicals) has peaked out.
Satish Pai, managing director at Hindalco, however, had told BloombergQuint in an interview that the company would announce capital allocation framework for Novelis and itself in the coming two weeks. This, he said, would include cash from operations, growth capex, deleveraging and dividend available to investors.
According to JPMorgan, dividends and shareholder buyback, market-based share buybacks would be EPS accretive and contribute to return on equity expansion.
And as investors get more conviction on global growth and see a sustained period of rising aluminum demand over the next two-three years, and management’s focus on increasing shareholder returns and RoEs, JPMorgan expects them to rerate stocks like Hindalco gradually over the next 12-18 months.
The research firm expects Hindalco to scale a target price of Rs 500 apiece, a more than 70% upside from the stock’s closing on Monday.
At present, 23 of the 24 analysts tracking Hindalco recommend a ‘buy’ and suggest a potential upside of 8.2%, according to Bloomberg data. The stock gained as much as 5.5% on Tuesday.