At Novelis, strong demand, record scrap spreads and ramp-up in auto volumes create upside risks to management margin guidance.
Well-placed. HNDL has corrected by 13% in the past two months and we find it attractively placed amid strong aluminum fundamentals and robust demand in the FRP segment at Novelis. India business should see margin expansion from elevated aluminum prices despite cost inflation. At Novelis, strong demand, record scrap spreads and ramp-up in auto volumes create upside risks to management margin guidance. The stock at 5X EV/EBITDA FY2023E offers attractive risk-reward. BUY with FV of Rs 500.
Novelis – robust margins despite semiconductor issues; likely to outperform margin guidance: Novelis has shown strong resilience with US$525/ton EBITDA in 2HFY21 after Covid hit in 1HFY21. We expect only a marginal volume impact in its auto segment in 1HFY22E from the ongoing semiconductor shortage as auto OEMs have prioritized aluminum-intensive vehicles. We expect Novelis to deliver at the upper end of its margin guidance in 1HFY22E ($500/ton) and see a potential expansion by $40-50/ton in 2HFY22E led by (1) the beverage can segment – tailwinds from a deficit market and higher margins on renewed contracts, (2) scrap spreads are at record high given strong LME, physical premiums and high UBC recovery rates in most markets, and (3) ramp-up of recently commissioned auto lines in North America and China.
Indian aluminum – strong prices to more than offset cost pressures: HNDL’s domestic aluminum division should see 3-5% sequential cost inflation in 1HFY22E led by higher coal and carbon costs. Strong metal prices should elevate aluminum EBITDA to $814/ton, +55% yoy, in FY2022E notwithstanding higher costs and low price hedges. The Utkal refinery is on track to commission in 2QFY22E and should aid in margins.
Deleveraging to continue and earnings have upside risk, reiterate BUY with Fair Value of Rs 500: HNDL’s leverage peaked in 1QFY21 and we expect deleveraging to continue with strong earnings and measured capex. Reiterate BUY on attractive valuations – 5X EV/EBITDA FY2023E with unchanged FV of Rs 500/share at 6.3X EV/EBITDA March 2023E.