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Deleveraging behind, focus shifts to growth

Strong aluminum demand drives growth capex

The management sees strong demand for aluminum from major segments like Beverage Can, Automotive Body Sheet, Specialties, and Aerospace.

The supply disruption in aluminum will deepen the deficit and result in higher LME prices through FY23 and FY24.

HNDL announced a strong growth capex pipeline of USD7.9b (including optional capex) over the next five years in both Novelis and its parent entity to deploy the strong cash flow expected in both companies. It expects to deploy ~75% of the FCF (post sustenance capex and working capital).

We raise our FY22/FY23 EBITDA estimate by 2.4%/6.6%, led by a 0.6%/10% increase in LME aluminum prices and raise our SoTP-based TP to INR750/share (from INR700 earlier). The key risk to our call is a slowdown in China, resulting in a correction in aluminum prices.

Demand to stay strong across segments through the next decade

The management sees strong growth for major downstream aluminum business segments where Novelis operates. The Flat Rolled Products (FRP) business is likely to clock 4% CAGR over FY22-26.

The deficit in the Can Sheet market is expected to increase to 500kt by CY30 from 300kt in CY22.

Deficit in the primary aluminum market is likely to deepen to 2.7mt in CY22 from 1.8mt in CY21, led by strong demand and a constrained supply due to the Russia-Ukraine conflict. We highlighted the impact on aluminum in our

With the aluminum market in deficit, coupled with strong demand growth and ESG support, we expect aluminum prices to remain above the cycle averages. While we retain our FY24 aluminum price assumption of USD2,400/t, we raise our near-term estimate to USD3,300/t (from USD3,000/t earlier), led by the Russia-Ukraine war and the resulting impact on the global aluminum market.

Announces capex worth USD7.9b over the next five years

HNDL announced a bouquet of capex across Novelis, its India operations, upstream, downstream, rolling, and recycling in anticipation of strong FCF generation over the next five years and a deleveraged Balance Sheet.

Though some of this capex has so far been classified as under evaluation, we expect these to be taken up in due course of time.  Of the USD7.9b capex (refer Exhibit 12 and 13), the management said capex worth USD5.6b is under evaluation. It is difficult to understand when ~70% of capex is under evaluation, why did the management announce all these new projects. The major projects under evaluation are brownfield and greenfield rolling mills, aluminum smelters, and an alumina refinery, all of which have a huge impact on operating cash flows and EBITDA. If these projects are approved, HNDL is likely to incur an annual capex of over USD2b over FY24- 26E. We have factored in a capex of USD1.1b/USD2b for FY23/FY24.

Balance Sheet in a comfortable position

Novelis has reduced its net debt/EBITDA ratio to 2.3x from 3.8x in the last seven quarters, driven by strong operating cash flows

Its India Balance Sheet has been deleveraged to 0.7x from 3.3x over the same period on strong LME prices

Going forward, the management expects LME prices to stay strong and capex to be funded via internal accruals.

Valuation and view

The stock trades at 4.8x/5.8x our FY23/FY24 EV/EBITDA estimate. Novelis is the largest secondary aluminum producer and the largest aluminum recycling company globally

Novelis has a 40% global market share in can body stock, where demand remains robust

HNDL is one of the lowest-cost producers of alumina at its Utkal refinery. The same has been fully ramped up, driving costs down further

The company is expanding both downstream and upstream to raise its aluminum capacity as well as the share of value add products, which will eventually reflect in an improved EBITDA margin

We raise our FY23 LME aluminum price assumption by 10% to USD3,300/t, driving an upgrade in our consolidated revenue/EBITDA/PAT growth by 5.2%/6.6%/12.8%. Our FY24 aluminum assumption remains unchanged at USD2400/t as we expect normalcy to return in Europe and the shortage of the metal to ebb.

We retain our Buy rating with an increased SoTP-based TP of INR750/share (from INR700 earlier).

The key downside risk to our call is a slowdown in China. A sharp reduction in LME prices will impact HNDL's capex plans adversely

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