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Novelis 1QFY25: Decent 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 by customers.

* Revenue stood at USD4.2b (+2% YoY/+3% QoQ) vs. our estimate of USD4.4b, mainly driven by higher average 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 got 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 includes 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-to-adj. EBITDA ratio of 2.4x.

Key highlights from the management commentary

Operating performance outlook

* 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.

* The management 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.

* The company currently utilizes ~65% of recycled content and targets to clock 75% by the end of the decade.

Bay Minette capex:

* Bay Minette expansion is on track and the management expects to commission it in 2QCY26.

* The management fully contracted the beverage packing facility at Bay Minette. Out of the total supply, 2/3rd will be for beverage packaging and the rest for automotive industry.

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

* Capex budget of ~USD4.1b for 600kt capacity is unlikely to be revised upward.

Guthrie capex:

* Guthrie expansion is the second largest capex undertaken by Novelis in North America and the project is progressing as per timelines within the set budget.

* A new automotive recycling and casting center was commissioned in 1Q, which will focus on the recycling of pre- and post-consumer auto scrap. With the fully ramped up capacity, the management expects annual casting capacity of 240kt.

* The increase in recycling content as a part of production will help to improve margins for Novelis going forward, along with a reduction in carbon emissions.

* With the commissioning of Guthrie facility, the management foresees further increase in recycling content, leading to margin accretion. The management aims to reach +75% by the end of the decade.

Demand Outlook:

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

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

* Cautiously positive outlook on beverage packaging demand in Europe and Asia.

* Europe and Asia see demand slow down on EV battery foils.

* Chinese imports are rising since there is less 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.

* Novelis IPO: The project has not been cancelled but postponed. Currently, no timing is announced for the same.

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

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