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Performance in line with estimates

Consolidated performance

* Consolidated net sales stood at INR570b (+8 YoY/+2% QoQ), largely in line with our estimate of INR583b, aided by better realizations and efficiency in India operations.

* Consolidated EBITDA came in at INR75b (+31% YoY/+12% QoQ), largely in line with our estimate of INR70b, driven by lower input costs and higher volumes. APAT of INR34b (+38% YoY/+7% QoQ) came in line with our estimate of INR35b.

* The net debt-to-EBITDA ratio stood at 1.24x vs. 1.73x at 1QFY24.

Aluminum business

* Upstream revenue stood at INR88b (+10% YoY). Aluminum upstream EBITDA stood at INR35b (+81% YoY), driven by lower input costs.

* Upstream EBITDA margins came in at 40%.

* Downstream revenue stood at INR29b (+18% YoY). Sales of downstream aluminum stood at 96kt (+19% YoY).

* Downstream EBITDA/t was USD138 vs. USD202 in 1QFY24.

Copper business

* Copper business revenue was INR133b (+16% YoY), aided by high shipments and realization.

* EBITDA for the copper business was at an all-time high of INR8b, up 52% YoY, backed by higher average copper prices and robust operations.

* Copper metal sales stood at 119kt (flat YoY). CCR sales came in at 100kt (+2% YoY), in line with growing market demand for VAP.

Novelis: In-line operating performance

* Shipments volume stood at 951kt (+8% YoY/flat QoQ), in line with our estimate of 954kt. The growth was primarily led by normalized demand for beverage packaging sheet, which was affected by inventory reduction.

* Revenue stood at USD4.2b (+2% YoY/+3% QoQ) vs. our est. of USD4.4b, mainly driven by higher avg. aluminum prices and higher total shipments.

* Adj. EBITDA stood at USD500m (+19% YoY/-3% QoQ), in line with our estimate. This improvement was primarily driven by higher volume and favorable product pricing, which was partially offset by a less favorable product mix and higher costs.

* EBITDA/t came in at USD526/t, in line with our estimate of USD525/t.

* APAT stood at USD237m (+43% YoY/-3% QoQ), higher than our est. of USD207m, led by lower-than-expected depreciation and interest charges.

* The company reported an exceptional item of USD86mn, which included initial charges associated with flooding at Sierre plant in Switzerland in Jun’24, as well as higher restructuring and unfavorable metal price lag.

* Capex stood at USD348m, primarily attributed to strategic investments in new rolling and recycling capacity under construction.

* Novelis has a strong liquidity position of USD2.2b, with cash & cash equivalents of ~USD886m. Net debt stands at USD4.6b, with a net debt-toadj. EBITDA ratio of 2.4x.

Highlights from the management commentary

* The management expects coal cost to remain flat QoQ in 2QFY25.

* Focus remains on downstream expansions at Silvassa Extrusion and Aditya FRP project, which are currently on track and expected to be commissioned by FY26, taking the total downstream capacity to 600kt.

* Silvassa extrusion capacity is currently operating at 40-45% of utilization and the management targets to reach an optimal utilization rate by FY25 end.

* The company has planned some large upstream expansion projects with expected capex of ~INR60-80b each: 1) Alumina refinery expansion in Odisha (expected timeline 20-24 months); 2) Copper smelter (under evaluation, to be commissioned in 36 months); 3) FRP-2 smelter of 180kt at Aditya.

* Out of the 300 MW of renewables capacity target by CY2025, the company achieved 57% or 173 MW in Q1FY25 and another 100 MW Hybrid (with storage) would be commissioned by 1HCY25.

* For FY25, the management expects capex of INR55-60b for India operation and USD1.4-2.1b for Novelis ongoing capex.

* Heavy rainfall led to flooding in Sierre and Valais regions in Switzerland, which affected operations at Novelis’s Sierre plant. The management indicated that the cleaning and restoration work is underway and the plant is expected to restart production by 2Q end. The company expects net impact of USD30m to adj. EBITDA, of which the majority will occur in 2Q.

* Novelis reiterated its near-term EBITDA/t target of USD525 with the help of various operating levers: 1) capacity expansion, 2) favorable pricing, 3) Higher recycle content, and 4) operating leverage. In the long run, EBITDA/t is expected to reach USD600/t with the commissioning of the recycling projects and new capacities.

Valuation and view

* HNDL’s 1Q consolidated performance was in line with expectations, driven by favorable pricing and lower input costs. Novelis also witnessed decent performance. Going forward, the cost of production in the aluminum business is expected to be under control, which would keep margins strong. Novelis would continue to see margin improvement across FY25 and FY26. 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 there will be no further changes in cost estimates.

* At CMP, the stock trades at 6x EV/EBITDA and 1.3x P/B on FY26E. We broadly maintain our estimates. We reiterate our BUY rating on HNDL with a revised TP of INR750 (based on SOTP valuation).

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