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We downgrade Hindalco to SELL from Reduce following a disappointing outlook from Novelis. We had recently initiated coverage on Hindalco indicating that the stock is pricing in all the positives and a part of that optimism was around Novelis in the lead up to its IPO, which was later called off. We were not convinced with its steep EBITDA/t improvement trajectory in the medium term and in playing the Bay Minette capex cycle. With the company now withdrawing its EBITDA/t guidance over concerns surrounding ‘accelerating’ tightening of scrap spreads with liberalization of scrap import by China, we think it creates a near-term overhang for the stock. We cut Novelis’s EBITDA/t estimate to USD477 from USD501 (previous guidance of USD525) for FY25. We think the pain on scrap spreads could endure for 2-4 quarters at least.

Novelis – 2Q FY25 Result Highlights

Novelis’s adj. EBITDA of USD462mn was 5.5% below our estimate of USD489mn and it declined 7.6% sequentially in 2QFY25, mainly due to increase in aluminium scrap prices and unfavorable product mix, as well as the USD25mn impact due to floods at Sierre. EBITDA/t at USD489 was 5% below our estimates. Revenue at USD4.3bn remained broadly in line with our estimates while growing 4.6% YoY, mainly driven by higher average aluminium prices. Net debt came in at USD4.8bn, rising 2.8% QoQ. Free cash flow was -USD345mn with capex of USD717mn in 1HFY25.

Novelis – Concall KTAs

The key focus at the call was around the withdrawal of EBITDA/t guidance and outlook on scrap spreads and demand. Management indicated near-term uncertainly on rising scrap prices and tightening scrap spreads, and are taking mitigation measures. Volumes and revenue guidance stays in place with the company indicating that they are not seeing demand destruction. Management to come back with well thought-out guidance once the situation normalizes. IRA program is expected to be scrapped under the new US government, hence, expected financial support for Bay Minette is now unlikely.

Implications

The withdrawal of EBITDA/t guidance over concerns surrounding ‘accelerating’ tightening of scrap spreads with liberalization of scrap import by China creates a near-term overhang. The company is taking measures to expand scrap supply sources as well as enhance its ability to process lower-grade scrap. On the demand side, the management indicated comfort in underlying demand remaining strong, especially in the beverage packaging market and are not seeing any demand destruction. However, global aluminium downstream peers have called out 25-30% EBITDA impact that is marketdependent – which makes us cautious, and therefore, we cut Novelis’s EBITDA/t estimate to USD477 from USD501 (previous guidance of USD525) for FY25.

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