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Novelis on track to achieve EBITDA/t of USD525 by 4QFY24; mid-to-long term EBITDA/t guidance stands at USD600

* Hindalco (HNDL) is undertaking ~USD6b (revised upwards from USD4.6b) multi locational-multi product growth capex over the next five years. The initiative aims to augment its capacity across various regions, including the USA (FRP and recycling mill), Utkal (alumina debottlenecking), Aditya (can recycling and battery foil mill), and Silvassa (extrusion).

* HNDL recently also announced its plan to set up a 25kt battery foil manufacturing facility at Odisha at a total capex of ~INR8b, which will cater to the growing domestic EV requirements.

* Around USD5.2b of capex is allocated to Novelis and ~68% of the growth capex in India (~USD1b) is allocated to the downstream business with focus on VAP.

* We believe HNDL is adding downstream capacities at the right time to capture the growth opportunities in the domestic market. HNDL’s increased focus on VAP catering niche segments across aluminum and copper will aid the company to improve its domestic EBITDA margins to over 10% by FY26E.

* We believe the upcoming 600kt facility at Bay Minette (Alabama, USA) will act as a proxy to the growing demand for beverage can and auto grade aluminum sheet in North America.

* With the majority of volumes contracted and booked by marque customers until the end of the decade, coupled with portfolio optimization, higher recycling capacities, and favorable market dynamics, Novelis is poised to achieve its medium to long-term EBITDA/t guidance of USD600.

* Novelis has recently submitted draft papers for IPO with the SEC. On successful completion of IPO, Novelis will be one of the few international subsidiaries of an Indian entity to be listed on international exchanges. The said IPO is expected to be an OFS and will help in value unlocking for the subsidiary.

* HNDL has robust integrated operations and despite base metal prices remaining range bound, we believe the long-term outlook remains positive. We reiterate our BUY rating on the stock, supported by our SOTP-based TP of INR600.

* Key Risk: HNDL has revised its capex outlay for the forthcoming Bay Minette rolling facility, reducing it by 65% to USD4.1b. Additionally, the commissioning of the facility has been delayed by a year to 2HCY26. Any additional extension to the capex timeline or an increase in capex would exert further pressure on the company’s cash flow.

HNDL on track to enhance its capacities

* HNDL has undertaken a mammoth ~USD6b (revised upwards from USD4.6b) multi locational-multi product growth capex over a period of the next five years. Around 85% of the total capex is earmarked for Novelis and the rest is towards enhancing the domestic aluminum and copper capacities.

* This capex will help HNDL to shift its focus from being a core metal manufacturer to a metal-solution provider with a strong focus on RE.

Bay Minette facility

* Novelis has revised its capex upwards by 65% and is investing ~USD4.1b (up from USD2.5b) toward setting up the Bay Minette facility, which will augment the FRP capacity by 600kt.

* The commissioning of this facility, aimed at addressing North America’s demand for beverage cans and auto-grade aluminum sheets, has been postponed by a year. The facility is now likely to be commissioned in 2HCY26; it would take around 18-24 months to achieve full operational capacity.

* Incremental volumes for the same are expected from FY27-28.

* The management has cited an increase in civil and structural costs for the rise in capex guidance.

* Novelis has entered into a long-term agreement to supply aluminum sheets with marquee customers, such as Coca-Cola, Ball Corp., Ardagh, and Airbus. With the majority of volumes contracted and booked by marque customers until the end of the decade, coupled with portfolio optimization, higher recycling capacities, and favorable market dynamics, Novelis is poised to achieve its medium to longterm EBITDA/t guidance of USD600.

Indian operations

* HNDL has earmarked ~USD1b for domestic capex with a strong focus on downstream projects. Around 68% of the growth capex in India is allocated to the downstream business with focus on VAP.

* HNDL recently announced its plan to set up a 25kt battery foil manufacturing facility at Odisha at a total capex of ~INR8b, which will cater to the growing domestic EV requirements.

* HNDL has also identified seven additional projects for future expansion across upstream, downstream, copper vertical, specialty chemicals, and energy at a total budgeted outlay of over USD2.3b, which is expected to be completed by FY28.

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