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Novelis reports another strong quarter, retain BUY

Adjusted EBITDA/t at USD544 despite several challenges

* Higher energy costs in Europe, a strike in Asia, semiconductor shortages in North America, and unplanned downtime in South America notwithstanding, Novelis delivered yet another strong set of earnings.

* We raise our FY22E/FY23E EPS by 19.6%/15%, led by a 13.8%/11.9% jump in EBITDA to INR276b/INR286b on the back of a hike in our LME assumptions by 10.6%/8.7% and a further depreciation in the USD:INR by 0.9%/1.9%.

* We raise our TP to INR605 from INR520/share, implying a 16% upside. A key risk to our estimates is a slowdown in China driving down commodities prices and COVID-related disruptions.

Operationally a strong quarter

* Shipments remained flat YoY, but fell 4% QoQ, to 930kt (est. 960kt) in 3QFY22, partly impacted by the reasons stated above and a seasonally weak quarter.

* Revenue stood in line at USD4,326m (up 33% YoY and 5% QoQ). Adjusted EBITDA grew 6% YoY, but fell 8% QoQ, to USD506m (est. USD509m) in 3QFY22 due to higher energy prices in Europe.

* However, EBITDA/t stood at USD544/t, a 5% beat on our estimate of USD530/t due to marginally lower-than-estimated shipments.

* Adjusted PAT grew 15% YoY, but fell 20% QoQ, to USD226m, 8% higher than our estimate due to an EBITDA beat.

* Revenue/adjusted EBITDA/adjusted PAT grew 9%/32%/52% in 9MFY22 to USD2,871m/USD1,567m/USD717m.

Highlights from the management commentary

* Challenges across Novelis’ key markets due to COVID-related disruptions continue, yet it delivered a strong 3QFY22.

* USD107mn run rate in Aleris acquisition synergies already achieved, the company is on track to exceed targeted USD220 mn in synergies

* Full yearFY22 capex has been revised down to USD550m from USD600- 700m earlier, owing to COVID-related challenges on the execution front. The management said this will not impact the commissioning timelines for various projects that are already in the pipeline.

* It announced USD870m worth of new projects, which includes rolling and recycling capacities that will further reduce its carbon footprint in both China and South America.

* Demand for FRPs continues to remain strong, with improving demand for Automotive sheets in North America, despite the semiconductor shortages, which is slowly ebbing.

* A large part of the EBITDA continues to be locked up in working capital. Novelis generated an EBITDA of USD1,614m in 9MFY22, which translated into an FCF of USD229m as USD895m was stuck in working capital (higher LME), while capex in this period was USD287m (v/s USD333m earlier).

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