PL First Cut – Novelis 2QFY24

PL First Cut – Novelis 2QFY24 – Tushar Chaudhari – Research Analyst, Prabhudas Lilladher Pvt Ltd

Novelis (HNDL IN, CMP Rs484, Mcap Rs1,086bn, BUY): Beats est.; Strong operating performance led by reviving volume growth; best placed amongst metals universe

☘️ Novelis’s adj. EBITDA per ton declined 5% QoQ to USD 519/t (-1% YoY) better than PLe of USD 462/t on strong 6% QoQ volume growth. Flat Rolled Products (FRP) volumes grew 6% QoQ to 933kt (-5.2% YoY; PLe 940kt) on stronger North America & European volumes.

☘️ Volumes: Shipments grew 5% QoQ in N. America to 390kt; grew 2% QoQ to 256kt in Europe; declined 1% QoQ to 175kt in Asia and grew sharp 21% QoQ to 144kt in S. America. EBITDA/t increased 19% QoQ in N. America to USD 533/t; grew 11% QoQ to USD 391/t in Europe; declined 5% QoQ to USD 469/t in Asia and declined 9% QoQ to USD 646/t in S. America.

- Lower beverage packaging shipments in Asia & South America and weak specialties in Europe affected volumes in 2QFY24. Beverage can destocking is largely over as per mgmt. and beverage can volumes are expected to improve in 2HFY24.

- Product mix for 2QFY24 was Beverage can ~55-59%, Auto ~19%, Aerospace ~4% and Specialties constituted ~17-19%

☘️ Capex: Novelis incurred capex of USD 285mn during 2QFY24 (USD 333mn in 1Q) and maintained capex guidance on lower side of earlier given range of USD 1.6bn-1.9 bn for FY24.

- The USD 2.8bn Bay Minette greenfield project (600ktpa) is on track to be commissioned in FY26 and has already secured long term customer commitments for Beverage can capacity. Negotiations with Automotive OEMs are on track for rest of the capacity.

- Rest of the capex for Auto recycling plant at US, debottlenecking projects at Brazil, US & S. Korea remains on track. Company expects to add 40ktpa in Brazil via debottlenecking and another 50ktpa debottlenecking opportunity in Asia.

☘️ Net Debt: Novelis completed refinancing of USD 750 mn outstanding under Term Loan due Jan 2025 with favorable spreads.

- Net debt stood at USD4.4 bn maintaining net leverage ratio at 2.7x and adequate liquidity of USD 2.3 bn as on 30th Sept’23.

☘️ PL View: Mgmt. expects Beverage can volumes to improve in 2HFY24 as S. America goes into summer, Auto and Aerospace demand to remain strong. However high inflation & interest rates in developed world and increasing competitive activity in container foil can impact Specialties volumes in the near term. 3QFY24 is seasonally weak quarter for Novelis and volumes are expected to be muted due to planned maintenance shutdown too. EBITDA/t is expected to remain in USD450-500 range and by 4Q it will be in-line with earlier guidance of USD 525/t. Despite business headwinds, Novelis continue to perform well and invest significantly in growth. Stock trades at EV of 5.3x/4.8x FY25/FY26E EBITDA respectively. Maintain BUY.