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Novelis margin headwinds transitory; India CoP to trend down; BUY

Hindalco reported 4Q consol. adj. EBITDA of INR54.2bn, broadly in-line with JMfe of INR50.0bn. India aluminium business (incl. Utkal) delivered an EBITDA of INR23.0bn up 32% QoQ driven by higher realisation / lower coal cost. Net debt decreased significantly during the quarter to INR340bn (vs INR417bn in 3Q) primarily due to working capital release. Key takeaways from the call are a) CoP India aluminium to remain flat QoQ during 1QFY24 b) 11% of FY24 aluminium volumes hedged at USD2.8k/t c) Chakla mine expected to be operational by FY26 d) capex for India operations / Novelis during FY24 expected at INR50bn / US$1.6-1.9bn. Despite near term uncertainty on account of de-stocking in beverage can segment, long term outlook for Hindalco continues to remain buoyant given a) Novelis – maintaining medium term EBITDA/t guidance of ~US$525 (expected by 4QFY24) b) resilient performance by India aluminium operations c) enhanced coal security post acquisition of Meenakshi and Chakla coal mines and d) growth capex to augment capacity in downstream business. Hindalco, given ~70%+ steady/strong EBITDA being non-LME linked, remains our preferred play in the metal space. Re-iterate Buy.

* Novelis performance improves sequentially aided by higher volumes and pricing: Novelis reported quarterly adjusted EBITDA of $403 mn (vs $341 mn), up 6.0% QoQ, supported by higher product pricing and volumes product mix. Novelis reported adjusted EBITDA per ton of $431 in Q4FY23 vs $376 in the prior quarter. Novelis’ revenue stood $4.4 billion (vs $4.2 billion), up 4.7% YoY, on account of higher aluminium prices and shipments. Total shipments stood at 936 Kt vs 908 Kt in Q3FY23, on account of improved performance in automotive and aerospace products.

* India aluminium business benefits from lower power cost: Aluminium EBITDA stood at INR23.0bn in Q4FY23 vs INR40.5bn for Q4FY22. Upstream EBITDA margins were at 27% and remain one of the best globally. Upstream revenue stood at INR80.5bn in Q4FY23 vs INR92.5bn in the prior year period. Downstream revenue stood at INR27.4bn in Q4FY23 vs INR32.8bn in the prior year period. Sales of downstream aluminium stood at 90 Kt vs 93 Kt in Q4FY22. India Copper business EBITDA stood at INR6.0bn in Q4FY23 compared to INR3.9bn in Q4FY22, on account of stable operations, higher domestic sales, and better TC/RCs. Coal sourcing during 4QFY23 comprised of 52% linkage coal, 44% e-auction, 2% captive and 2% imports.

* Growth capex on track: Hindalco remains committed towards on-going projects however new projects will be undertaken based on free cashflow generated. The company’s 350 Kt expansions via debottlenecking at Utkal Alumina remains in progress. 34Kt aluminium extrusions plant in Silvassa began commercial production. The company expects capex for Indian operations at INR50bn during FY24 primarily towards Hirakut and Chakla mines. Commissioning of Chakla mines expected by FY26.

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