IGI Logo

Novelis reported a subdued Q1, missing market expectations. The performance remains affected by elevated scrap cost, which started impacting margins last year and is now exacerbated by the impact of tariffs. The management gave guidance for tariff impact of USD60mn per quarter at Section232 rate of 50% on aluminium. EBITDA trajectory is expected to remain weak for Q2 given the tariff hit, while Q3 would see an uptick even as the seasonally soft patch is likely to affect Q3 volumes. By Q4, the tariff impact is expected to be absorbed by cost takeout and mitigation measures. Focus would remain on defending volume and increasing recycled content. We expect consensus numbers to be revised lower, by a mid-single-digit % based on these results. Nevertheless, the company has largely flagged off the earnings impact from the ongoing issues for the next 2- 3 quarters, with the indication that profitability is close to bottoming out with Q2FY26 possibly a trough quarter for Novelis; maintain REDUCE.

Novelis: Q1 impacted by sustainably elevated scrap cost overlaid by tariffs

Novelis reported Q1FY26 EBITDA of USD416mn, missing market expectations, and is down 12.1% QoQ and 16.8% YoY. Profitability was partially squeezed by net negative tariff impact of USD28mn. However, even adjusting for tariffs, performance has been subdued due to sustainably elevated scrap cost. From a margin standpoint, the company reported EBITDA/t of USD432 in Q1 vs USD494 in Q4. Essentially, the company started witnessing a deterioration in profitability since last year owing to rise in scrap cost, which is now exacerbated by the tariff hit.

Key takeaways from the earnings call

1) Margins: Margin contraction is mainly due to sustained scrap cost overlaid by the tariff impact. 2) Tariff impact: The management has given guidance for tariff impact of USD60mn per quarter at Section232 rate of 50% on aluminium. 3) EBITDA indication: The EBITDA trajectory is expected to remain weak for Q2 with impact from tariffs, while Q3 is expected to see uptick even as the seasonally soft patch is likely to affect Q3 volumes. By Q4, the tariff impact is expected to be absorbed by cost takeout and mitigation measures. Focus would remain on defending volumes and increasing recycled content. 4) Cost takeout: The company has implemented USD100mn of cost takeout measures for FY26 with a one-time restructuring cost of USD83mn. 5) Leverage: Peak net debt-to-EBITDA might briefly surpass the less than 3.5x target as the company progresses on Bay Minette capex, while profitability remains subdued in the near term.

Consensus revisions likely negative; earnings impact largely flagged off

We expect consensus numbers to be revised lower, by a mid-single-digit % based on these results. Nevertheless, the company has largely flagged off the earnings impact from ongoing issues for the next 2-3 quarters with the indication that profitability is close to bottoming out, with Q2FY26 possibly a trough quarter for Novelis.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354