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Long-term margin levers in place

In the long run, Hindalco Industries (HNDL IN) may witness margin expansion in its domestic business, driven by operational benefits from coal mines and a higher share of value-added products. For Novelis, margin growth would be supported by operating leverage, contract repricing, and cost-saving initiatives. As most margin drivers are likely to materialize beyond FY27, we retain our earnings estimates and our TP of INR 734. As our TP offers an upside potential of ~11%, we revise to Accumulate from Buy

Capital allocation involves balancing leverage, growth and shareholder return:

HNDL reiterated its long-term growth plans for the next few years, with a consolidated ~USD 10bn growth capex under execution during FY24-29. This investment will be distributed between Novelis at ~USD 5.0bn and India operations at ~USD 5.2bn. Despite these expansion plans, the company aims to keep consolidated net debt-EBITDA at 2.0x, with India operations at 1.5x and Novelis at 2.5x. Also, 8-10% of free cashflow, after maintenance capex and working capital, will be allocated toward shareholder return. While any major deleveraging is unlikely in the near term, debt reduction activities may take place in Novelis post completion of the Bay Minette project in FY27.

Bay Minette not only to prop up growth…

Out of Novelis capex of ~USD 5bn, the upcoming 600,000-tonne capacity at Bay Minette in the US is a major growth project with a capex of USD 4.1bn and is likely to be completed by H2CY26. Management also sees potential to double flat rolled products (FRP) capacity at this facility. Apart from Bay Minette, Novelis is also debottlenecking in the US and Brazil, which will add ~175,000 tonne of capacity. Post completion of these projects, Novelis capacity will increase from the current ~4.2mn tonne to ~5.0mn tonne by FY27.

…but also be a key trigger for long-term EBITDA/tonne target of USD 600:

Management expects Novelis long-term adjusted EBITDA/tonne to reach USD 600+ vs USD 491 (trailing twelve months ending December 2024), led by 1) operating leverage from scale (meaningful contribution coming from Bay Minette), 2) better pricing, 3) improved product mix, 4) operational efficiency & cost optimization, and 5) increased recycled input. According to management, the Bay Minette project will generate an EBITDA/tonne of USD 1,000. Also, several cost-saving initiatives and improved operational efficiency are set to result in cumulative cost savings of ~USD 75mn by end-FY26, ~USD 250mn by end-FY27 and USD 300mn beyond FY28.

Revise to Accumulate with an unchanged TP of INR 734:

We retain our earnings estimates for FY25-27; thus, our SOTP-based TP remains unchanged at INR 734, ascribing 6.0x March 2027E EV/EBITDA to Novelis and 5.5x March 2027E EV/EBITDA to other business. As our TP offers an upside potential of ~11%, we revise to Accumulate from Buy. Demand slowdown from key end-user industries, weak aluminium prices and adverse currency movement are risks to our call.

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