Buy Hindalco Ltd for the Target Rs.1,100 by Emkay Global Financial Services Ltd
Novelis reported a strong Q4 performance, with adj EBITDA of USD459mn ahead of our estimate, driven by improving scrap spreads and cost-efficiency initiatives, despite headwinds from the Oswego fire and tariffs. Adj EBITDA/t remained strong at USD544, even after adjusting for one-offs. We expect earnings recovery from Q2FY27 onward, supported by improving scrap spreads, normalization of tariff impact, early restart of the Oswego mill, and Bay Minette commissioning by H2CY26. While leverage may remain elevated near term amid pending Bay Minette capex, we expect balance sheet improvement following the ramp-up and insurance recoveries. We maintain BUY and TP of Rs1,100.
Strong Q4 driven by improving scrap spreads
Novelis reported a strong Q4 performance, largely driven by improving scrap spreads and benefits from ongoing cost-efficiency initiatives, partly offset by volume loss related to the previously disclosed Oswego plant fire in the US. Consequently, adj EBITDA came in ahead of expectations at USD459mn (+31.9% QoQ, -3.0% YoY) vs our estimate of USD416mn, despite a USD53mn impact from the fire incident and a USD27mn tariffrelated headwind, partially offset by USD41mn in insurance recoveries related to the Sierre flood event. Adj EBITDA/t stood at USD544 and remained at similar levels even after adjusting for the fire-related and tariff impacts, thereby coming ahead of consensus expectations. Operationally, shipments increased 4.3% QoQ but declined 11.8% YoY to 844kt. Novelis reported a net loss of USD84mn vs our estimate of a USD89mn loss.
Headwinds easing; recovery expected from Q2FY27 onward
Novelis’s profitability during the year was impacted by weaker scrap spreads at the start of the year, higher tariff-related costs, disruption from the Oswego fire incident, and capex escalation at the Bay Minette project. However, most of these headwinds now appear to be easing, with scrap spreads improving on the back of stronger LME aluminium prices, tariff impact expected to be fully absorbed by Q1FY27, and Bay Minette commissioning remaining on track for 2HCY26. Importantly, the Oswego mill restart has commenced well ahead of the earlier Jun-26 guidance, with operations expected to resume over the next few weeks and ramp up swiftly to pre-fire levels. Against this backdrop, we expect Novelis’s earnings recovery to strengthen from Q2FY27 onward as Oswego volumes normalize, supported further by improving scrap spreads and global cost-efficiency programmes.
Near-term leverage elevated; normalization expected post ramp-up
Novelis reported net debt of USD6.7bn in Mar-26, with net debt-to-EBITDA rising to 4.1x from 3.7x in Dec-25. With insurance recoveries likely to be staggered over the next two years and USD1.8bn of Bay Minette capex still pending, leverage could temporarily rise toward ~4.5x in the near term. However, with Bay Minette commissioning on track for H2CY26 and Oswego operations normalizing, we expect leverage to moderate toward ~4.0x by end-FY27 and decline further thereafter. We maintain BUY and TP of Rs1,100.
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