Q4FY23 Review: Hindalco: Weak outlook for Novelis key concern

25 May 2023 , 10:58 AM

Hindalco’s Q4 India business Ebitda at rs25.8bn was in line with estimates. Incrementally, outlook for LME Al is weak but should see partial offset from lower CoP (coal, other RMs), even as mgmt guidance is cautious. Outlook for volumes and hence Ebitda/t at Novelis is weak in near term, given continued destocking for cans and weakness for specialities demand. This drives 9%/5% cut to FY24/25 Ebitda. Net debt fell to Rs340bn in Q4, backed by strong FCF at Novelis. Incrementally, ND/Ebitda would remain stable at 1.7x.

In-line Q4 for India business: 

Hindalco reported India business Ebitda of Rs25.8bn – in line with IIFLe. Cu Ebitda beat estimates at Rs5.98bn, aided by healthy 117kt volumes. Al business Ebitda was inline at Rs23bn with lower COP (down 6% QoQ, aided by 16% fall in coal costs) offsetting lower-than-expected volumes at 323kt. Downstream Al business performance was weak with 90kt volume and US$151/t of Ebitda (vs US$210 QoQ) amid weak demand. Going ahead, management guided cautiously for a flat CoP QoQ despite falling thermal coal prices and better availability. Downstream performance should improve on the back of better demand.

Weak near-term outlook for Novelis: 

With continued destocking for beverage cans in North America and Europe, and weak outlook for specialities in North America (amid high interest rates), FY24 volumes would at best remain flat at 3.8mt. This would also limit gains from operating leverage. Hence, recovery of Ebitda/t to guided sustainable levels of US$525 would be very gradual. Pricing gains for contract renewals would help though. Analysts of IIFL Capital Services bake in Ebitda/t of US$447/482 for FY24/25 on volumes of 3.8/4.1mt.

Healthy deleveraging in 4Q: 

Hindalco ended FY23 with consolidated net debt of Rs340bn – vs Rs417bn in Q3FY23, led by strong US$600mn FCF in Q4 for Novelis. Incrementally, the company has guided to US$1.6-1.9bn capex at Novelis and Rs50bn in India operations towards ongoing projects. This would drive the consolidated net debt up but ND/Ebitda at 1.7x should stay, per analysts of IIFL Capital Services estimates.

Analysts of IIFL Capital Services retain BUY; but expect sluggish stock performance in near term.