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Upstream-Downstream performance divergence

Hindalco delivered a strong upstream performance that is on a firm foot vs a starkly different downstream performance with bleak near-term outlook for Novelis, balancing out one another in Q2 and resulting in EBITDA beat of 9.5% at business segment level. On Novelis, there is no incremental clarity, especially on quantification in terms of impact on profitability from rise in scrap prices. It seems a part of margin contraction is structural. Near term, mgmt indicated that direction of profitability is lower, at least in Q3/4 FY25. On Upstream, full benefit of the alumina price increase in likely to be realized in Q3/4, given realization lag; hedges roll-off at USD2,700/t for FY26 which we see as an attractive level; supply deficit of ali in China is positive for prices. Copper TC/RC negotiation for CY25 is scheduled this week in China; maintain SELL; TP: Rs600.

Q2FY25 earnings beat of 9.5%

Hindalco reported Q2FY25 headline EBITDA of Rs91bn, 26.3%/23.1% ahead of consensus/Emkay estimates. Adjusting for one-offs, the beat was 9.5% vs our estimates, led by better cost control and healthier premiums. Upstream delivered healthy EBITDA/t of USD1,349 in Q2 vs USD1,273 in Q1, despite sequentially lower prices. Copper EBITDA benefitted by higher by-product prices. Net debt came in at Rs360bn (+1.4% QoQ).

Upstream hedges favorable; Novelis’s profitability to worsen in Q3/4 FY25

At the earnings call, the discussion revolved around Novelis’s bleak outlook, upstream performance along with alumina price benefits and volume hedging, and growth projects with a nuanced discussion around copper smelter project against the backdrop of subdued TC/RCs. 1) Novelis: There is no incremental clarity, esp on quantification in terms of impact on profitability from rise in scrap prices. It seems a part of margin contraction could be structural, given that China is putting up 20mt of scrap melting capacity and drawing down scrap from rest of the world. It is difficult to pass-through scrap price rise to customers. Near term, mgmt indicated that direction of profitability is lower, at least in Q3/4 FY25. 2) Upstream: Full benefit of alumina price rise likely to be realized in Q3/4, given realization lag; ali hedges roll-off at USD2,700/t for FY26 which we see as an attractive level; supply deficit of ali in China positive for prices. 3) Copper: TC/RC negotiation for 2025 to happen this week in China; indicative levels significantly lower. 4) Projects: 3 growth projects: 180kt ali smelter, 850kt refinery, 280-300kt copper smelter, costing ~USD1bn each with expected commissioning over 2027-29.

Raising near-term price forecasts results in upgrades to earnings

We recently upgraded our near-term ali price forecasts, essentially marking-to-market for increase in spot prices (Exhibit 1). Incorporating the Q2 results (which were ahead of expectations) and our latest commodity price deck, our EBITDA estimates increase by 11.5% for FY25, while the revisions are modest for out-years.

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