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Novelis has indicated that its Q3FY25 EBITDA could range at USD360-370mn (-21% QoQ; -14% vs Emkay). Q3 shipments are expected to range at 900-910kt – slightly lower than our estimate of 913kt, and 945kt shipments in Q2. This translates into decline in EBITDA/t to USD403 for Q3 vs USD489 in Q2 and earlier guidance of USD525. We think the Novelis pain is likely to persist for 2- 3 quarters at least. While the management was confident that it was not seeing end-demand slowdown during Q2 earnings, we are of the belief that moderation in auto and specialty segments has worsened in recent months. For us, the key catalyst now would be guidance reinstatement for a sustainable EBITDA/t in the near term which we think could end up lower than the earlier guidance of USD600/t in the medium term. We maintain SELL; TP is unchanged.

Novelis – Disappointing Q3 with weaker than expected profitability Novelis has published its preliminary financial results as part of the debt refinancing offering of USD500mn. The company has indicated its Q3FY25 EBITDA could range at USD360-370mn, which implies sequential decline of 21%, and is lower than our estimate of USD424mn. Also, Q3 shipments are expected to range at 900-910kt, which is slightly lower than our estimate of 913kt, and 945kt shipments in Q2. This translates into decline in EBITDA/t to USD403 for Q3 vs USD489 in Q2 and earlier guidance of USD525. Novelis withdrew its EBITDA guidance at the time of Q2 earnings and called out pain on profitability owing to increase in scrap cost as a result of rising scrap imports by China.

Our take

We think the Novelis pain would persist for 2-3 quarters at least. While the management was confident that it was not seeing end-demand slowdown at the time of Q2 earnings, we reckon that the moderation in auto and specialty segments has worsened in recent months. Global downstream peers had already called out demand slowdown last quarter, and our sense is that the slowdown has possibly caught up with Novelis as well. As a result, we do not anticipate a meaningful recovery in Q4 either, even though the management expects a sequential recovery. For us, the key catalyst now would be guidance reinstatement for a sustainable EBITDA/t in the near term which we think could end up lower than the earlier guidance of USD600/t in the medium term.

We maintain SELL with unchanged target price of Rs550

Our SELL rating was partially premised on our view that the run-up in the stock leading up to the Novelis IPO last year was unwarranted and that the excess optimism should get priced out (read: Q3 Previews). In addition, we believe Hindalco's earnings momentum has matured for now, and our experience suggests that equities struggle to perform against moderation in earnings momentum. We therefore maintain our SELL rating, with unchanged target price of Rs550.

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