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Elevated EBITDA print faces multiple risks ahead

Novelis continues to surprise with US$583/te of EBITDA in Q1FY23. Smoother production, reduced supply-chain disruption, pick up in autos leading to better mix and better pricing in specialties (yet untouched by the impending housing weakness) helped in EBITDA improvement. Management guided for medium-term EBITDA of US$525/te. Energy costs are hedged at 80% of exposure in Europe for FY23E, and 50% for FY24E – thus, sitting in a comfortable position (Germany contributes 2/3rd of total sales in Europe). Management is now guiding for lower end of US$1.3-1.6bn of capex for FY23E (Q1FY23 capex has been US$110mn) as projects have been pushed forward because of some delay in China integration and expansion of projects. Every US$100 of aluminium price decline will lead to the release of US$80mn in working capital, and majority of cashflow benefit is expected in Q2FY23. Downgrade Hindalco to SELL from REDUCE with a revised target price of Rs345/share

*Uncertain macro environment leads to a relatively conservative US$583/te of EBITDA print from Novelis. Q1FY23 witnessed sharp premium expansion across North America, Europe and Asia. The sharp premium expansion (QoQ e.g. derived average premium for US deliveries increased from US$1770/te to US$2548/te) more than offset the cost increases, and also shows in a strong price mix gain of US$160mn+ in the YoY EBITDA bridge. While management deems US$525/te as a conservative/realistic EBITDA guidance for the remainder of FY23E, we do see meaningful risks to the same. Energy exposure to Europe is hedged. Management expects significant working capital release in Q2FY23, which will allow a sharp increase in the expansion over FY23E without shoring up leverage

* Capital projects update. Novelis is embarking on a five year, transformational organic growth period to further strengthen its industry-leading position. The company has identified more than US$4.5bn of potential investment opportunities. US$3.4bn of planned capex investments are already underway. Greenfield will be a long hot roll capacity in phase 1, for phase 2 management is contemplating for further brownfield CRM and downstream expansion and highlighted that it will be efficient to expand the capacity. The IRR of mid-teens is only for phase 1. Novelis has already booked 30% of the greenfield capacity, with pricing in line with midteens IRR guidance.

* Downgrade to SELL from REDUCE. We see limited earnings tailwinds from Novelis in FY23E. With FY24E LME assumption of US$2,300/te, expected RoE of <10% and attributed P/B of 0.8x (increased from 0.7x earlier), Novelis earnings for FY23E has been mapped to guidance which leads to an earnings upgrade for FY23E.

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