Hindalco Cut To 'Underperform' By CLSA On U.S. Project Cost Overrun

CLSA downgraded Hindalco Industries Ltd. ratings, citing cost expansion and delayed benefits from its key U.S. project.

The stock was cut to 'underperform' from a 'buy' after the company's U.S. subsidy Novelis forecast a higher capex of $4.1 billion from its initial projection of $2.5 billion for its 600kt Bay Minette expansion.

The commissioning of the project too has been pushed back by 9–12 months to the second half of 2026.

"With cost escalation at key projects and benefits likely three years out, we believe its current stock price leaves limited rerating room," CLSA said in a report.

In October 2022, Novelis had begun constructing its recycling and rolling plant in Bay Minette, Alabama.

The internal rate of return for the project has been revised down to low double-digits from mid-teens. "On our estimates, to generate a low double-digit IRR, the project would need initial profitability of $900–1,000 per tonne. By FY24, we would have spent $750 million of this, with the rest to be spent over the next three years," the brokerage said.

But it raised Hindalco's target price from Rs 590 apiece to Rs 635 apiece after Novelis detailed its earnings for the third quarter of FY24 on Monday. The new target price implies an upside of 25.39% from the current market price.

Shares of Hindalco slumped as much as 14.58% to Rs 497.50 apiece on Tuesday, the lowest level since Nov. 20, 2023.

"Operationally, Novelis’ 3Q results were ahead of our estimates with adjusted Ebitda/t of $499 and 4Q guidance of $525. Per Novelis, it has levers to raise profitability to $600/t," CLSA said.

On the downside, risks include higher-than-expected volume decline on global environment, lower aluminum prices, a higher-than-expected drop in auto sheet volumes and profitability due to the semiconductor shortage, lower beverage can demand (for Novelis), and a contraction in recycling spreads, the brokerage said.