IGI Logo

Novelis 1QFY26: Largely in-line performance; favorable pricing benefits offset by higher scrap prices

• Shipments volume stood at 963kt (vs. our estimate of 975kt), up 1% YoY and flat QoQ, primarily led by higher beverage packaging shipments, partially offset by lower automotive and specialty shipments.
• Revenue stood at USD4.7b (+13% YoY and +3% QoQ) against our estimate of USD4.4b, led by a healthy ASP, which stood at USD4,898/t (+11% YoY and +2% QoQ), mainly driven by favorable aluminum prices.
• Adjusted EBITDA stood at USD416m (vs. our est. of USD434m), declining 17% YoY and 12% QoQ, driven by higher aluminum scrap prices, an unfavorable product mix, and a net negative tariff impact.
• Adj. EBITDA/t for the quarter stood at USD432 (against our est. USD445), declining 18% YoY and 13% QoQ.
• APAT stood at USD156m in 1QFY26 (-34% YoY and -38% QoQ), in line with our estimate. The decline was mainly attributed to soft operating performance.
• Capex for 1QFY26 stood at USD386m, primarily attributed to the new Greenfield rolling and recycling plant in Bay Minette, Alabama.
• Net debt/EBITDA as of Jun’25 stood at 3.2x vs 2.9x in Mar’25. The company issued USD400m of tax-exempt bonds with a mandatory tender for purchase in 2032 and maturation in 2055, which will be used to finance Bay Minette expansion.

Key highlights from the management commentary Operating performance guidance and outlook

• Increase in scrap prices (especially for used beverage cans) will continue to keep margins under pressure; however, the positive metal price lag from Midwest Premium movements (increased from ~USD450/t to ~USD1,500/t in recent months) could partially offset the impact.
• The company expects the US tariff on aluminum imports (particularly from South Korea and Canada) to affect 2QFY26 EBITDA by USD60m QoQ, which may partially be offset by the US Midwest premium. Management expects adj. EBITDA/t to bottom out by the end of 1HFY26. H2FY26 is expected to see a rise in EBITDA levels.
• Management is pursuing multiple mitigation plans, such as partial pass-through to customers, supply chain optimization, Midwest Premium arbitrage, and long-term domestic capacity expansion.
• The mitigation plan is expected to offset a significant portion of the tariff cost from 2HFY26, with full impact anticipated by 4QFY26.
• Management expects some tariff cost recovery to be achieved via customer discussions, although the company is avoiding renegotiating contracts midterm to protect relationships and volumes.
• The commissioning of Bay Minette will reduce the import dependency and free up other US capacities for high-margin (automotive and specialty) products.
• Management does not expect any volume loss due to tariff issues – the mitigation plan is designed to protect shipments and maintain customer relationships.

Capital allocation update

• The 600kt Bay Minette facility remains on schedule for commissioning in 2HCY26, with most equipment delivered and the steel structure nearing completion. The company has spent ~USD1.8b on the project to date.
• Management expects to spend ~USD1.9b-2.2b in FY26 and about USD300-350m for maintenance capex.
• The company has maintained its net leverage target of ~3.5x. Management expects fluctuations in the near term but no long-term deviation from the target.

Scrap market & recycling strategy

• Currently, US spot prices for UBCs are well below contracted prices, creating a temporary disadvantage.
• North America and Europe have high levels of contracted scrap volume, while Asia and South America are more exposed to volatile spot prices.
• The company is expanding the use of other scrap categories (mixed, automotive end-of-life, construction) to diversify input costs.
• The average recycling rate remains at ~63% (with a target to achieve 75% in the next 2-3 years), whereas the ramp-up of the Guthrie 240kt and Ulsan 100kt recycling plants will lead to a greater absorption of scrap, increasing scrap consumption.

Market outlook and others

• Positive metal price lag this quarter was led by a sharp increase in Midwest Premiums, not from LME aluminum prices, as LME is hedged.
• Near-term demand outlook for automotive and specialty markets remains soft, with a gradual recovery expected.
• Demand for beverage cans remains resilient, supported by consumer preference shifts and sustainability trends.
• Specialty segment volumes declined, with the biggest drops in construction, electronics, and certain industrial applications, reflecting macroeconomic softness and inventory adjustments.
• North America saw stable beverage can demand but weaker auto and specialty orders. Europe experienced mixed trends with beverage can resilience but softness in industrial markets. Meanwhile, Asia and South America witnessed a slower recovery in non-beverage segments.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412