Company Update : Hindalco Ltd By Motilal Oswal Financial Services Ltd
Novelis 3QFY25: Revenue in line; higher input cost impacts earnings
* Shipments volume stood at 904kt (YoY/QoQ: -1%/ -4%), against our estimate of 910kt. The weakness in volume was primarily due to lower VAP and automotive shipments.
* Revenue stood at USD4.1b (YoY/QoQ: +4%/-5%), largely in line with our estimate of USD4.2b, which was supported by higher average aluminum prices.
* Adjusted EBITDA stood at USD367m (YoY/QoQ: -19%/-21%), below our estimate of USD428m. This was primarily driven by higher aluminum scrap prices and unfavorable product mix.
* EBITDA/t came in at USD406/t (against our estimate of USD470/t) in 3QFY25.
* APAT stood at USD125m (YoY/QoQ: -36%/-38%) against our est. of USD154m.
* Total capex for 9MFY25 stood at USD1.2b, primarily attributed to strategic investments in new rolling and recycling capacity in Bay Minette.
* Current net debt to Adj. EBITDA stands at 2.9x compared to 2.5x in 2QFY25
Key highlights from the management commentary
Operating performance outlook
* Management guided that the 4QFY25 will be better than 3Q, led by higher volumes, better product mix, new contract pricing, and increased recycled aluminum usage.
* Management guided for high recycle content, supported by the Guthrie operation, compared to 63% currently.
* The change in product mix was driven by higher beverage can volumes and weaker auto volumes.
* The Guthrie recycling center continues to ramp up automotive sheet ingot casting.
Bay Minette capex
* Novelis raised USD750m of senior notes in Jan’25 and plans to raise an additional amount later in the year to fund Bay Minette.
* The capex budget of ~USD4.1b for 600kt capacity is unlikely to be revised upwards.
* The Bay Minette project remains on schedule. A capex of USD 1.3b was spent by the end of Q3FY25, with commissioning expected in 2HCY26.
* The plant will have ~600kt capacity 420kt for beverage packaging and 180kt for automotive (primarily) and FRP 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 will take about 18-24 months to fully ramp up to peak utilization.
Demand outlook
* The company foresees a 4% growth in the aluminum FRP market. Global beverage packaging demand remains strong.
* Constraints in the supply chain are impacting OEM production of new aircraft.
* Increased competition and higher demand from China have led to significantly higher scrap aluminum prices, reducing the metal benefit from using scrap inputs.
* The near-term outlook for the automotive market is mixed, with a favorable vehicle mix in North America but slower growth in Europe and China due to weaker macroeconomic conditions.
* Specialties demand is expected to improve in the next couple of quarters, with building and construction demand improving with declining interest rates.
Other highlights
* The Logan hot mill expansion to debottleneck 80kt capacity is on track for completion in Q1FY26. ? The Midwest premium will likely increase dollar-for-dollar, which could actually be positive for Novelis’ recycling business.
* For cross-border trade between Canada and the US, management is confident that Novelis will secure exemptions.
* There may be some short-term cash flow impact during the transition, but Novelis believes exemptions will be granted due to the lack of domestic aluminum supply.
* Capex guidance for FY25 is in the range of USD1.8-2.1b, with about 60-65% allocated to the Bay Minette plant. Overall, ~USD3.4b capex outflow is expected over FY25-26E.
* Net debt is expected to increase this year due to capex commitments. However, the threshold remains at 3.5x for Net Debt/EBITDA.
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