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Demand concerns hit prices; non-LME business relatively steady

Aluminium price has sharply corrected from its peak of USD3.8k/t to ~USD2.5k/t spot, on the back of expected demand slowdown globally. Pick - up in aluminium output from China has further adversely impacted LME prices. Global players expect aluminium to remain in deficit despite improving supply from China. Base case deficit for 2022 is expected at 0.6 mn tons (source: Norsk Hydro Investor presentation 1QCY22), it may increase to ~1.3 / 1.7 mn tons factoring adverse scenarios (refer exhi. 13). Further, LME inventory remains at multi-year low levels of ~408kt. This may likely cushion aluminium prices going forward. The recent correction in aluminium price has also impacted scrap spreads with QTD 1QFY23 spreads at ~US$1k, down 14% QoQ and spot spreads at ~USD720/t. Novelis remains confident of achieving an EBITDA/t of ~USD500 per ton. Demand environment across can segment (~58% of shipments) is expected to remain robust given its counter cyclical nature and sectoral supply constraints. Ball Corporation a leading can maker shared a robust outlook on can segment across geographies.

The outlook for Hindalco continues to remain buoyant given a) Novelis – continues to maintain EBITDA/t guidance of ~USD500 b) drop in energy price is likely to cushion margins amidst correction in LME prices c) growth capex to augment capacity in non-LME linked business – Novelis, amidst encouraging demand for FRP products d) enhanced coal security post acquisition of Meenakshi and Chakla coal mines at recent auctions. Post the recent correction, the stock offers an attractive risk reward. Re-iterate BUY with a revised fair value of INR515/sh (refer exhi. 1)

* Novelis guidance steady at USD500 EBITDA/t: The recent correction in aluminium price has impacted scrap spreads with QTD 1QFY23 spreads at ~US$1k down 14% QoQ and spot spreads at ~USD720/t. Novelis remains confident of achieving an EBITDA/t of ~USD500 per ton. Demand environment across can segment (~58% of shipments) is expected to remain robust given its counter cyclical nature and sectoral supply constraints. Ball Corporation a leading can maker shared a robust outlook on can segment across geographies.

* Aluminium market expected to remain in deficit for multiple years: Aluminium price has sharply corrected from its peak of US$3.8k/t to ~US$2.5k/t spot on the back of expected demand slowdown globally. Global players expect aluminium to remain in deficit despite improving supply from China. Base case deficit for 2022 is expected at 0.6 mn tons (source: Norsk Hydro Investor presentation 1QCY22), it may increase to ~1.3 / 1.7 mn tons factoring adverse scenarios (refer exhi. 12). Further, LME inventory remains at multiyear low levels of ~408kt. This may likely cushion aluminium prices going forward.

* Growth capex focused on augmenting capacity in Novelis: Novelis announced USD3.4 bn of strategic capital investments towards transformational organic growth over the next five years driven by encouraging demand trends. The company announced a USD2.5 bn investment in greenfield Rolling Mill in Alabama, US mainly to capitalise on the can sheet market supply/demand imbalance in North America. Novelis expects mid-teens IRR from

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