Novelis still generated healthy FCF after interest payment of $235 million in 2Q (1H: $158 million). Net debt declined 4% QoQ to $5.0 billion.
Key takeaway: Novelis’ 2Q EBITDA at $553 million rose 9% QoQ (+22% YoY) and was 12% above JEFe. Shipments were flattish QoQ but EBITDA/t expanded 9% QoQ to a new high of $571. Novelis was upbeat on demand across segment and expects margins to sustain above $500/t. Stock has outperformed Nifty by ~70% CYTD but 1.2x FY23E PB is reasonable for 16% FY23E ROE. We retain ‘buy’ with Rs610 PT; HNDL remains our preferred pick in India metals.
Another strong quarter at Novelis: Novelis’ 2Q adjusted EBITDA at $553 million was up 9% QoQ (+22% YoY) and 12% above JEFe. 2Q volumes were flattish QoQ but EBITDA/t expanded 9% QoQ to a new high of $571. 2Q recurring PAT at $244 million was up 54% YoY. Rising aluminum prices resulted in $144 million of working capital outflow in 2Q (1H: $515 million). Novelis still generated healthy FCF after interest payment of $235 million in 2Q (1H: $158 million). Net debt declined 4% QoQ to $5.0 billion.
Strong demand and margin outlook: Novelis continues to see strong demand across its key segments. Beverage can business is benefiting from shift in package mix from plastics and glass, and higher at-home consumption amid Covid. Notwithstanding the near-term chip shortages, outlook for automotive aluminum remains strong, led by vehicle light-weighting, electrification and shift towards SUVs and pick-up trucks. Strong demand across housing, electronics and transportation is positive for the specialty segment. Novelis’ EBITDA/t has expanded from ~$300 in FY14-16 to $450 in FY20 and $571 in 2QFY22, and the strong demand outlook across key segments is a positive for profitability. While a significant drop in beverage can scrap spread could pose some margin pressures, Novelis is confident of sustaining EBITDA/t above $500.
Auto expansions come on-line: Novelis has expanded its auto capacities by 300ktpa to ~1mt. These facilities have started commercial production and should ramp up over the next two-three years, increasing share of autos in total shipments from 16% in 1HFY22 to 25%. Novelis is setting up a new facility in China for $375million, which will facilitate integration of Aleris’ capacity and enable realisation of $100million in synergies. Novelis is also embarking on a $130-million investment in the US, which will add ~124kt capacity (3% of total).
Aluminum prices ease after a sharp rally: LME aluminum prices rallied a sharp 30% over mid-July to mid-Oct, but have since corrected 16% to $2,680/t at spot (in-line with September-Q average). Thermal coal prices rose from average of $139/t in September-Q to peak at $236/t in Oct’21 but have since fallen 45% to $129/t. Alumina price, on the other hand, have risen from $426/t at end-August to $627/t at spot. Any cost push in aluminum, especially alumina, should be beneficial for HNDL as it has 100% captive bauxite and sources most of its coal within India at below-global prices.
Retain Buy: We fine-tune FY22-23E EBITDA and EPS factoring higher margins at Novelis but lower our aluminum price assumption from $2,600 to $2,500 (7% below spot). Stock has outperformed the Nifty by ~70% CYTD; however, its 1.2x FY23 PB is still reasonable versus 2010-11 peak of 1.7x despite similar 15-16% ROE expectations. We reiterate ‘buy’ with a Rs610 PT, which implies 1.6x FY23E PB.