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In-line revenue; lower costs lead to strong EBITDA beat Consolidated performance

* HNDL’s consolidated net sales stood at INR582b (+7 YoY/+2% QoQ) in 2QFY25 vs. our est. of INR569b, aided by better realizations and efficiencies in India operations.

* Consolidated EBITDA stood at INR79b (+40% YoY/+5% QoQ) vs. our est. of INR66b, driven by lower costs. APAT stood at INR43b (+97% YoY/+25% QoQ) vs. our est. of INR31b.

* HNDL reported one-time exceptional expenses of INR5.1b related to flooding at the Sierre plant.

* For 1HFY25, revenue stood at INR1,152b (+8% YoY), EBITDA came in at INR154b (+36% YoY), and APAT was INR77b (+66% YoY). For 2HFY25, we expect revenues, EBITDA and APAT to grow by 8%, 18% and 34% YoY, respectively.

* The net debt-to-EBITDA ratio stood at 1.19x in 2QFY25 vs. 1.24x in 1QFY25.

Aluminum business

* Upstream revenue stood at INR91b in 2QFY25 (+16% YoY), led by higher average aluminum prices.

* Aluminum upstream EBITDA stood at INR37b (+79% YoY), driven by lower input costs. EBITDA margin was 41% in 2QFY25 vs. 26.3% in 2QFY24.

* Downstream revenue stood at INR32b (+20% YoY) due to higher volumes. Downstream aluminum sales came in at 103kt (+10% YoY), led by market recovery.

* Downstream EBITDA/t was USD179 vs. USD138 in 1QFY25 and USD202 in 2QFY24.

Copper business

* Copper business revenues stood at INR131b (+5% YoY), aided by higher average copper prices.

* EBITDA was at an all-time high of INR8.3b in 2QFY25, up 27% YoY, backed by higher copper prices and robust operations.

* Copper metal sales stood at 117kt (-13% YoY) and CCR sales stood at 90kt (- 10% YoY) in 2QFY25.

Novelis: In-line operating performance

* Shipment volumes stood at 945kt (+1% YoY/flat QoQ) vs. our estimate of 961kt. The growth was primarily led by strong demand for beverage packaging, offset by lower VAP shipments and automotive shipments. Volumes were also impacted by flooding-related production interruption at the Sierre plant.

* Novelis’ 2QFY25 revenue stood at USD4.3b (+5% YoY/+3% QoQ), in line with our est. of USD4.2b, mainly driven by higher aluminum prices.

* Adjusted EBITDA stood at USD462m (-5% YoY/-8% QoQ), in line with our estimate. The EBITDA decline was primarily driven by a rapid increase in aluminum scrap prices and an unfavorable product mix, along with USD25m impact at the Sierre plant due to floods.

* EBITDA/t stood at USD489 (est. USD496) and APAT came in at USD202m (-9% YoY/-15% QoQ) vs. our est. of USD187m.

* Total capex for 1HFY25 stood at USD717m, primarily attributed to new rolling and recycling capacity.

* For 1HFY25, Novelis posted revenue of USD8.5b (+3% YoY), EBITDA of USD962m (+3% YoY), and APAT of USD439m (+13% YoY).

Highlights from the management commentary

* Aluminium CoP in 2QFY25 was down 1.2% QoQ and is expected to increase marginally by 1-1.5% in 3QFY25 due to higher coal auction premiums.

* Management expects to clock an EBIDTA run rate of INR6b per quarter in copper business.

* Coal sourcing: Linkages – 50%, Own mines – 2%, E-Auction – 48%

* Out of the 300MW of renewables capacity target by CY2025, HNDL achieved 183MW in 1H, and another 15MW of solar and 100MW Hybrid (with storage) would be commissioned by 1HCY25.

* The company has hedged 30% of commodity at USD2517/t, and additional 15% is hedged at USD2262/t with a ceiling price of USD2542/t.

* Bauxite supply disruption in Guinea and Alcova pushed alumina prices higher to USD700/t. The high cost alumina impact will start reflecting from 3Q as ~80% of the contract is benchmarked to spot minus 1-month price and 20% on spot basis.

Valuation and view

* HNDL’s 1HFY25 consolidated performance was better than our estimates, driven by favorable pricing and lower input costs. Novelis has also posted a decent performance as anticipated. Going forward, the cost of production in the aluminum business is expected to inch up, led by coal e-auction premium and rising scrap prices, which might impact margins in the near term. Novelis would continue to see margin-softened earnings in 2HFY25, due to rising scrap prices and a weak demand outlook in Europe.

* The ongoing capex in Novelis would establish HNDL as the global leader in beverage cans and automotive FRP segments. The capex is likely to be completed within the revised timeline, and management does not see any further capex increase.

* We maintained our FY26/FY27 estimates, while we raised our EBITDA/APAT estimates by 6%/9% for FY25. At CMP, the stock trades at 5.5x EV/EBITDA and 1.1x P/B on FY27E. We reiterate our BUY rating on HNDL with a revised SoTPbased TP of INR780.

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