IGI Logo

Novelis 2QFY25: In-line performance

* Shipments volume stood at 945kt (YoY/QoQ: +1%/ flat) against our estimate of 961kt. The growth was primarily led by strong demand from the beverage packaging segment offset by lower shipments to some specialty end markets and the automotive segment. Volumes were also impacted due to flooding-led production interruption at the Sierre plant.

* Novelis (HNDL)’s 2QFY25 revenue stood at USD4.3b (YoY/QoQ: +5%/+3%) inline with our estimate of USD4.2b, mainly driven by higher aluminum prices.

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

* EBITDA/t stood at USD489/t (vs our estimate of USD496/t) during the quarter.

* APAT stood at USD202m (YoY/QoQ: -9%/-15%) against our est. of USD187m.

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

* The current net debt to Adj. EBITDA stands at 2.5x as compared to 2.4x in 1QFY25.

* For 1HFY25, revenue was at USD8.5b (+3% YoY) and EBITDA came in at USD962m (+3% YoY).

*  Novelis reported an APAT of USD439m (+13% YoY) during 1HFY25.

Key highlights from the management commentary

Operating performance outlook

* The flood in Sierre in June adversely affected EBITDA. Sierre operations restarted in September, with ramp-up planned for Q3FY25. The flood hampered the EBITDA performance by USD25m (net of insurance).

* Higher aluminum prices and increased FRP shipments boosted net sales. Beverage packaging shipments grew, while specialties and automotive shipments shrank, mainly due to the Sierre flood. Adjusted EBITDA per ton declined 5% to USD462m.

* Higher SG&A costs from wage inflation, an unfavorable product mix, and rising metal scrap prices further weighed on adjusted EBITDA.

* Rising scrap aluminum prices adversely impacted performance.

* Scrap prices were anticipated to rise over time, but their accelerated increase, due to China’s policy changes, was unexpected. Near-term EBITDA per ton guidance is withheld until the market stabilizes.

* The automotive recycling center in Guthrie, Kentucky, U.S., is in its initial production and ramp-up phase.

* Aircraft demand remains strong, though OEMs face supply chain issues. Automotive sees a favorable mix of SUVs and trucks. The main concern is the volatility in aluminum scrap prices.

*  Volume guidance is on track, with confidence in aligning with the market growth of 4%.

*  Asia’s EBITDA per ton dropped from USD469 to USD460 YoY due to an unfavorable product mix (higher beverage, lower automotive demand), while South America saw an increase in EBITDA per ton, driven by higher operating volumes, leverage, and improved product mix.

* The company remains optimistic about 3Q performance, despite scrap price pressures, due to its superior operational efficiency. Guidance remains on hold until the market conditions stabilize.

* North America and Asia face the biggest headwinds from the rising scrap prices.

* The company is expanding aluminum scrap supply sources and focusing on technology efficiency for recycling.

* The company anticipates that scrap price hikes will impact 2HFY25 results.

*  Beverage packaging remains strong with momentum expected to continue. In North America, automotive demand shows no significant slowdown among Novelis’ customers, though certain OEMs have scaled back. In Europe, German OEMs have been affected by the economic downturn, but conditions outside Germany remain stable. Specialty products continue to witness solid demand despite high interest rates.

Bay Minette capex:

* The Bay Minette project remains on schedule. Capex of USD 1.1b was allocated to Bay Minette in 2QFY25, with commissioning expected in the 2HCY26.

* The plant will have ~600kt capacity — 420kt for beverage packaging and 180kt for automotive (primarily) and specialties (if feasible). Long-term beverage packaging contracts have already been secured for this facility.

* Bay Minette’s IRR is expected to stay in double digits, assuming scrap prices remain tight, as anticipated over time.

* The capacity would take about 18 to 24 months to fully ramp up to peak utilization.

*  The company’s capex budget of ~USD4.1b for 600kt capacity is unlikely to be revised upwards.

Demand outlook:

* The company foresees a 4% growth in the aluminum FRP market.

* Supply chain inventory reduction is now a thing of the past for the beverage packaging demand. Growing signals are seen in the beverage cans market globally.

*  The company has a cautiously positive outlook on the beverage packaging demand in Europe and Asia.

*  Europe and Asia are experiencing a slowdown in the demand for EV battery foils.

* Chinese imports are rising due to the lower supply in America. Bay Minette is being set up to capture the market share and become a domestic supplier for consumers.

Other highlights:

*  Capex guidance for FY25 will be in the range of USD1.8-2.1b and about 60-65% of the capex would go for the Bay Minette plant. Overall ~USD3.4b capex outflow is expected over FY25-26E.

*  Expect net debt to increase this year due to capex commitments. However, the threshold remains at 3x for Net Debt/EBITDA.

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

SEBI Registration number is INH000000412