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Near term margin headwinds a dampener; long term story intact

Novelis reported 2Q adj. EBITDA of USD506mn, higher than JMfe of USD483mn. Adj. EBITDA came lower sequentially on account of geopolitical instability, inflation, global supply chain disruptions, as well as unfavourable foreign exchange translation. The company achieved adj. EBITDA/t of USD514 during 2QFY23 despite challenging circumstances. Key takeaways from the call are – 1) Long term contracted rates for ~50% of greenfield capacity imply potential upside to sustainable EBITDA/t guidance of USD525/t 2) medium term adj EBITDA/t guidance maintained at USD525/t while high cost inventory and inflationary pressures to result in sub USD450/t EBITDA in near term 3) capex guidance for FY23 revised lower to USD0.9bn-1.0bn (USD1.3bn-USD1.6bn earlier) expect ~USD500mn of free cashflow in FY23 (1H free casflow was negative USD90mn) aided by working capital release in 2H. The company continues to witness stable demand for sustainable aluminium solutions, given positive demand outlook across end user segments. Hindalco, given ~75%+ steady/strong EBITDA being non-LME linked, remains our preferred play in the metal space. Re-iterate Buy.

* Robust performance despite challenging circumstances : Net sales decreased 5.7% QoQ to USD4.8bn vs USD5.1bn in 1QFY23; on account of lower aluminium prices. Total flat rolled product shipments stood at 984 ktons in 2QFY23 compared to 962 ktons in 1QFY23. Shipment growth is mainly due to higher automotive shipments as semiconductor shortages impacting the automotive industry began to ease, as well as slightly higher beverage can and aerospace shipments, partially offset by lower specialty shipments.

* Inflationary pressures adversely affect Margins: Adj. EBITDA decreased 9.8% QoQ to USD506mn in 2QFY23 vs USD561mn in 1QFY23. The underlying decrease in Adj. EBITDA is primarily due to geopolitical instability, inflation, and global supply chain disruptions, as well as unfavourable foreign exchange translation. These headwinds were partially offset by higher product pricing, including some higher cost passthrough to customers, higher volume, and favourable product mix. Novelis achieved an Adj. EBITDA per ton of USD514 in 2QFY23, compared to USD583 in 1QFY23.

* Outlook across most segments to remain positive: Beverage cans continued to witness stable demand. Near term focus on destocking may likely have an adverse impact on demand. High levels of pent-up vehicle demand and low dealer inventory to ensure robust demand across the automotive segment. Aerospace is witnessing improvement in order bookings while speciality segment witnessed some softness due to seasonality and macro-economic environment.

* Capex guidance for FY23 lowered to USD0.9bn-1.0bn: Novelis has embarked on a five year organic growth period to strengthen its industry leading position. The company has planned capital investments of ~USD3.4bn across different projects. FY23 capex guidance has been lowered to ~USD0.9bn-1.0bn vs previous guidance of ~USD1.3bn-USD1.6bn. The company expects to maintain its leverage and does not intend to raise debt for funding the Capex projects. Liquidity position remains strong at USD2.8bn as of 30 Sept 2022.

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