Aleris reported strong margins in the quarter; prospects are good for Novelis given a host of positives; ‘Buy’ retained.
Novelis’ Q4 adj. Ebitda beat our estimates as both volume and margin surprised positively. We stay positive on Novelis given resilient auto sheet volumes in US, improving beverage can sheet market and elevated scrap spreads despite recent correction in Al LME. We believe concerns around potential downward repricing of auto contracts may be overdone. Separately, Aleris reported strong margins in March quarter. Hindalco will report standalone results on 16th May.
Q4 adjusted Ebitda up 12% y-o-y
HNDL’s subsidiary Novelis (55% of Ebitda) reported adj. Ebitda of $357 mn (11% q-o-q). Volume rose 8% y-o-y to 870kt. Ebitda/ton was $410/ton ($14/ton y-o-y, +$7/ton q-o-q) ahead of our US$404/ton estimate.
US margins strong q-o-q; EU stable; Asia margins lower
United States margins rose $86/ton q-o-q led by scrap tailwinds, favourable autos and beverage can market conditions. EU margins fell $29/ton y-o-y (stable q-o-q) because of weaker EUR, and softer auto volumes due to issues at JLR. Asia margins were affected due to weaker Korean Won, while moderation of scrap spreads affected South America margins.
Improving beverage can sheet outlook, autos volume resilient
Beverage can volumes (63% of FY19 vols.) rose 13% y-o-y in Q4 (7% in FY19), as per our estimate. Beverage can sheet market is improving. Near term reset in can sheet contracts is unlikely as per mgmt, but given tightening beverage can sheet markets, pricing could improve in the medium term. Autos volumes were stable (Q4 flat y-o-y, 2% y-o-y FY19) as auto sheet demand in US stayed strong. Auto sheet markets remain tight in US which should support pricing in the segment.
Net debt declines q-o-q
Q4 net debt was $3.4 bn (Q3 $3.7 bn). FCF post capex, interest was $281 mn (Q3 $23 mn) partly due to working capital release. Mgmt expects capex of $700 mn in FY20 (FY19 $350 mn), incl. $500 mn capex towards expansion projects. Novelis expects FCF to be significantly positive, but lower y-o-y in FY20.
Aleris reported strong margins
Aleris (proposed to be acquired by Novelis) reported adj. Ebitda (ex start-up cost) of $85 mn (41% q-o-q) and Ebitda/ton of $383/ton ($278/ton Dec Q) led by (i) ramp-up of auto volumes and favourable scrap spreads in N. America; (ii) stronger aero volumes which offset weakness in autos in Europe. Aleris expects adj Ebitda in June quarter to be better q-o-q.
Proposed Aleris merger update
Anti-trust approvals in EU, US and China are pending. Novelis remains confident of getting the approvals without need for divesting assets and expects to close the deal by Q3CY19.