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Novelis margins; lower CoP to drive earnings trajectory

Hindalco reported 2Q consol. adj. EBITDA of INR56.4bn, significantly lower than JMfe of INR63.5bn – mainly due to accounting adjustments arising out of conversion from US GAAP to IND AS. India aluminium business (incl. Utkal) delivered an EBITDA of INR22.5bn up 8% QoQ aided by lower costs and increased volumes. Net debt decreased sequentially to INR376bn (vs INR385bn in 1Q). Key takeaways from the call are a) Aluminium CoP expected to be flat in 3Q – CoP was down 6% in 2Q due to lower coal costs b) Company has hedged 5% of FY25 aluminium volumes in range of USD2.2k2.5k/t c) Company commissioned 350ktpa alumina capacity in Utkal d) Chakla mine moving as per plan and expected to be operational by FY26 e) the company recently won the Meenakshi west mine which can offer ~6-7mn ton of coal per year f) capex for India operations / Novelis during FY24 expected at INR45bn / US$1.6-1.9bn g) Company to invest INR80bn in two tranches for 2mn tons greenfield alumina refinery in Odhisa. The long term outlook for Hindalco continues to remain buoyant given a) Novelis – remains confident of achieving its medium term EBITDA/t guidance of ~US$525 (expected by 4QFY24) b) resilient performance by India aluminium operations c) enhanced coal security post acquisition of Meenakshi, Meenakshi west and Chakla coal mines and d) growth capex to augment capacity in downstream business. Hindalco, given ~70%+ steady/strong EBITDA being non-LME linked, remains our preferred play in the metal space. Maintain BUY.

* Novelis margins aided by end of destocking in beverage can segment : Novelis reported quarterly adjusted EBITDA of $484mn vs $421mn, up 15% QoQ, due to operating leverage aided by 6% volume growth. Novelis reported adjusted EBITDA per ton of $519 in 2Q vs $479 in the prior quarter. Novelis’ revenue stood $4.1bn flat sequentially, on account of lower realizations offset by improved volumes. Total shipments of flat rolled products were at 933Kt in 2Q vs 879kt in 1Q, up 6% QoQ on account of improved volumes in beverage can segment post de-stocking. However, volumes are likely to be impacted in 3Q on account of planned plant maintenance.

* India AL business spreads positively impacted by lower costs: Aluminium EBITDA stood at INR22bn in 2Q vs INR21bn in 1Q primarily driven by lower COP even as realisations trended down. Upstream EBITDA margins were at 26.3% and continue to be one of the best in the global industry. Upstream revenue stood at INR79bn in 2Q vs INR80bn in the previous quarter. Downstream revenue stood at INR26bn in 2Q vs INR24bn in the prior quarter. Sales of downstream aluminium stood at 94ktons vs 81ktons in 1Q. India Copper business EBITDA stood at INR6.5bn in 2Q compared to INR5.3bn in 1Q, on account of lower COP. Coal sourcing during 2QFY24 comprised of 53% linkage coal, 43% e-auction, 2% captive and 2% imports.

* Growth capex on track: Hindalco plans to invest INR80bn in 2mn tons greenfield alumina expansion with 150MW power plant. Hindalco has signed a bauxite supply contract with OMC regrading the same. Novelis has already signed long term contracts with Ball North America for aluminium beverage can sheet supply

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