IGI Logo

Capacity expansion to drive next leg of growth; Novelis to witness further margin gains

* Hindalco (HNDL) is undertaking a capex of ~USD6.9b (USD4.9b for Novelis and USD2b for HNDL) to expand capacities for several products across multiple locations over the next three to five years. This capex plan will augment its capacity across USA (FRP and recycling mill), Utkal (alumina debottlenecking), Aditya (can recycling and battery foil mill) and Silvassa (extrusion), among others.

* For FY25, the management expects to incur a capex of ~INR60b in India for: 1) mines expansion; 2) alumina refinery; 3) FRP-II expansion (battery and copper foil, copper tube, copper e-waste recycling foil); 4) smelter expansion; and 5) aluminum power work.

* We believe the upcoming 600kt facility at Bay Minette (Alabama, USA) will act as a proxy for the growing demand for beverage cans and auto-grade aluminum sheets in North America. The company has fully contracted its beverage packing facility at Bay Minette. Novelis has witnessed margin improvement in the last few quarters, which is likely to continue in FY25.

* In India, we believe HNDL is adding downstream capacities at the right time to capture growth opportunities in the domestic market. HNDL’s increased focus on VAP for niche segments in aluminum and copper will help the company improve its domestic EBITDA margins to +10% by FY26E.

* HNDL has robust integrated operations and with rising base metal prices, we believe the long-term outlook remains positive. The capacity expansions would position HNDL well to capitalize on growth opportunities. We reiterate our BUY rating with our SOTP-based TP of INR790.

Key Risk: Any further extension in the capex timeline, along with an increase in capex, will add pressure on the cash flow.

HNDL on track to enhance its capacities

* HNDL has undertaken a ~USD6.9b (revised upward from USD4.6b) multi locational-multi product capex over the next three to five years. Around 70% (USD4.9b) of the total capex is earmarked for Novelis and the rest for enhancing the domestic aluminum and copper capacities.

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

* The management aims to upscale the share of low-carbon sources to 30% for aluminum production by 2030.

Bay Minette facility

* Novelis’s capex of ~USD4.1b to set up its Bay Minette facility for augmenting 600kt of FRP capacity is progressing well. This facility will cater to North America’s beverage can and auto-grade aluminum sheet demand.

* The expansion plan has been delayed by a year and the facility is now likely to be commissioned in 2HCY26, and would take 18-24months to fully ramp up. Therefore, we believe any significant incremental volumes will start in FY27-28.

* Novelis has fully contracted its entire beverage packing facility to marquee customers. In the near term, we believe Novelis is on track to see margin improvement, aided by portfolio optimization, higher recycling capacities and favorable market dynamics.

Indian operations

* HNDL has earmarked ~USD2b for domestic capex with a strong focus on downstream projects for improving VAP share.

* It is also setting up a 25kt battery foil facility in Odisha with a capex of ~INR8b to cater to the growing demand from the domestic EV segment.

* The company has also identified several projects for future expansion across upstream, downstream, copper vertical, specialty chemicals and energy with an outlay of USD2.3b by FY28E. Other international geographies

* HNDL is investing USD365m in Guthrie, US, to set up a state-of-the-art automotive recycling and casting facility. This is the second-largest capex undertaken by Novelis and the project is progressing well. The facility is on schedule to be commissioned by 1QFY25 and will focus on the recycling of preand post-consumer auto scrap.

* The higher recycling content as a part of production will help Novelis improve margins going forward, along with a reduction in carbon emissions.

* Novelis is also undertaking multiple debottlenecking projects across geographies, which will yield high returns through either additional capacity or cost reduction initiatives.

*  Novelis has a current rolling capacity of ~4.2mt, which will increase to 4.5mt after the completion of all the debottlenecking projects, and to over 5.1mt after the completion of the Bay Minette facility.

* The management expects a capex of ~USD1.4-2.1b (60-65% for Bay Minette) for FY25 (overall ~USD3.4b capex outflow expected over FY25-26E).

Coal linkages to drive cost synergies

* HNDL’s total coal requirement is ~16.2mt, which is currently fulfilled either by its linkages (~60%), e-auctions (~36%) or own mines/imports.

* Chakla mine, which has PRC of ~4.5mt, is expected to come on stream by 3QCY25 (earlier Dec’24). It was delayed due to a delay in forest clearance.

* Chakla mine is expected to start its production in FY25E and would exit FY25 with a production of ~1mt. The mine will reduce the company’s dependency on procurement of coal from external sources.

* HNDL is still awaiting allotment amid land acquisition issues for 10mt Meenakshi mine and as a back-up plan, HNDL acquired Meenakshi West mine at a ~33% premium, which has PRC of 6-7mt.

* The management aims to increase the share of low-carbon sources to 30% for aluminum production by 2030.

Valuation and view: reiterate BUY

* The company’s Indian operation is net debt free and HNDL’s consolidated ND/EBITDA ratio improved to 1.21x as on Mar’24 vs. 1.43x in Dec’23.

* Though the ongoing capex at Novelis would position HNDL as the global leader in beverage cans and automotive FRP segments, any further extension in the capex timeline, along with an increase in capex outlay, will put pressure on the cash flow of the company. Its capex would be a key monitorable for any further cost revisions or delays.

* Volume growth across geographies is expected to remain stable going forward and HNDL has already secured long-term contracts from marquee customers for its Bay Minette facility, which provides future revenue visibility. Therefore, with favorable pricing and muted costs, Novelis will see its EBITDA/t improve further in the mid-to-long term.

* We reiterate our BUY rating on HNDL with our SOTP-based TP of INR800. The stock is trading at 6.5x FY26E EV/EBITDA and 1.5x FY26E P/B.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412