Hindalco: Well placed despite higher capex at Novelis

11 Mar 2024 , 10:29 AM

Hindalco saw a sharp correction post reporting ~60% rise in the planned capex for Novelis’ Bay Minnete plant. While this definitely is a key disappointment, confidence on improving Ebitda/t at Novelis continues to be led by operating leverage (healthy demand), falling costs and higher pricing. India business remains is on track with falling CoP and lower expected Al deficit in 2024. Proceeds from the planned Novelis IPO in USA should ideally be repatriated to Indian operations/ shareholders. At 6.5x FY25 EV/Ebitda, stock is fairly priced.

Novelis on a path to improving profitability:

Recovery in volumes post destocking for beverage cans, fall in energy costs and strength in auto sheets have driven steady uptick in Ebitda/t and Q4 is expected at long-time guidance of US$525/t. The company also highlighted medium-term guidance of US$600/t of Ebitda, backed by higher volume (operating leverage) on healthy demand as well as increasing share of better pricing/margin volumes as contracts get renewed. Gains from Bay Minnete will only come in FY28 though.

Higher capex at Bay Minnete a key disappointment:

The recent revision of Bay Minnete 600kt greenfield plant capex from US$2.5bn to US$4.1bn has been a key disappointment, especially given the reason (hurried initial assessment). Additionally, commissioning is delayed by ~9 months to 2H26. Management still expects low double-digit IRRs vs mid-teen earlier, but gains to reported Ebitda will only flow from FY28 onwards. Higher capex will also strain debt levels with consolidated ND/Ebitda expected to rise to 2x by FY26 vs 1.6x (FY24).

India operations to benefit from lower costs:

Indian Al business has seen a steady fall in CoP, led by better coal availability and falling e-auction premiums. Commissioning and ramp-up of Chakla and Meenakshi (W) coal mines over FY25-27 would further aid CoP. LME Al has remained range-bound around US$2200, but the expected surplus for 2024 is much lower vs 2023; also, any uptick in demand globally would be a key trigger. Cash flow from stake sale during planned Novelis’s IPO should ideally be returned to shareholders given that India entity is debt free.