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With destocking in rear-view, shipments and margins to surge

Novelis reported 1Q adj. EBITDA of USD421mn, in line with JMfe. Adj. EBITDA came in higher sequentially due to higher pricing and favourable mix despite lower shipments. The company achieved an EBITDA/t of USD479 during 1QFY24 vs US$431 in 4QFY23. Key takeaways from the call are – 1) beverage can segment de-stocking is nearly complete with volumes expected to improve going forward 2) EBITDA/t over the coming quarters expected above US$450/t 3) the company remains confident of achieving its guidance of sustainable EBITDA/t at US$525 by 4QFY24 4) the current quarter had higher shipments from the auto segment - mix likely to normalise in favour of can sheet without adversely impacting spreads as recycling benefits kick in 5) capex cost for Bay Minette project increased to US$2.7-2.8bn (US$2.5bn earlier) due to higher than expected cost of environmental permitting. The earnings trajectory is likely to benefit from both higher shipments and higher margins as the company moves onwards to its journey of sustainable EBITDA/t of US$525/t. Hindalco, given ~70%+ steady/strong EBITDA being non-LME linked, remains our preferred play in the metal space. Re-iterate BUY.

* Lower shipments adversely impact revenues: Net sales decreased 7.0% QoQ to USD4.1bn vs USD4.4bn in 4QFY23; largely on account of lower realisations and shipments partially offset by increased product pricing and favourable product mix. Total flat rolled product shipments stood at 879 ktons in 1QFY24 compared to 936 ktons in 4QFY23.

* Margins aided by lower RM and favourable mix: Adj. EBITDA increased 4.5% QoQ to USD421mn in 1QFY24 vs USD403mn in 4QFY23. The underlying increase in Adj. EBITDA is primarily due to a favourable product mix and lower input costs. Novelis achieved an EBITDA/t of USD479 in 1QFY24, compared to USD431 in 4QFY23.

* Beverage can segment de-stocking nearly complete: De-stocking in beverage cans segment impacted shipments during the quarter. However, de-stocking in can segment is nearly complete with volumes expected to improve going forward. The company also signed long-term agreement to supply aluminium beverage can sheet to The Coca-Cola system. Building & construction (1/3rd of speciality) was impacted due to unfavourable economic conditions. Demand for premium automotive sheet remains strong and led to record automotive shipments in the quarter. Demand from the aerospace segment also remains robust aided by strong OEM build rates and high order backlog.

* Higher capex results in cash outflow: Novelis reported an outflow of US$349 mn in 1QFY24, primarily due to a planned three-fold increase in capital expenditures as the company ramps up strategic investments in the new rolling and recycling capacity. Capex cost for Bay Minette increased to US$2.7-2.8bn (US$2.5bn earlier) due to higher than expected cost of environmental permitting. The company expects commissioning by FY2026.

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