Novelis' disappointing Q4 suggests near-term weakness for Hindalco stock

Novelis’ results for the January-March quarter of the 2022-23 financial year (Q4FY23) disappointed investors and as a result, the share price of Hindalco (Novelis is a 100 per cent subsidiary of Hindalco) has slid.

The non-ferrous metals major is suffering from the impact of a down-cycle in aluminium and copper, as well as the slowdown imposed in Europe by the Russia-Ukraine war.

Prospects for the firm look gloomy, at least for the first half (H1) of FY24.

Novelis’ Q4FY23 Ebitda (earnings before interest, tax, depreciation and amortisation) were below estimates on weak volumes (down 5 per cent year-on-year (YoY)), partly offset by quarter-on-quarter (QoQ) or sequential recovery in margins.

Channel destocking and weak macro conditions continued to impact the beverage cans and other specialty segments, which contributes 80 per cent to volumes.

The company did not offer volume guidance for FY24 due to near-term uncertainties.

The management expects normalisation of margins by Q4FY24, but the next three quarters could be weak.

At the same time, it is in the middle of a capex plan which will mean negative cash-flow till FY25.

Novelis’ Q4FY23 adjusted Ebitda of $403 million was down 6.5 per cent YoY, but up 18 per cent QoQ.

Volume was down 5.2 per cent YoY and up 3.1 per cent QoQ, at 0.94 million tonnes.

Adjusted profit after tax (PAT) dipped 13 per cent YoY but was up 36 per cent QoQ, at $197 million.

The adjusted Ebitda of $431 per tonne was similar to FY22 with higher energy costs and lower volumes, being offset by higher product pricing.

A sequential recovery in margins was due to higher auto and aero product volumes and higher product pricing after contract resets in January 2023.

The Europe side saw a sharp 38 per cent YoY increase in Ebitda (up 134 per cent QoQ).

However, management cautions the cost benefits enjoyed in the quarter are not sustainable.

Takeaways from the call include the following insights: the destocking of the beverage can segment will continue in H1FY24 with volumes expected to improve towards the end of Q2FY24.

The building and construction industry, which contributes 1/3rd of speciality volumes, may see softening demand during the 2023 calendar year.

Automotive segment demand is expected to remain robust, aided by easing supply chain issues.

Aerospace outlook also remains positive, given recovery in passenger traffic.

Novelis guides for a capex between $1.6 and 1.9 billion during FY24.

Novelis hopes to maintain leverage within the range of net debt/Ebitda of 3x but net debt is expected to increase in H1FY24 and deleveraging in H2FY24.

The company maintains medium term guidance of sustainable Ebitda per tonne of $525 by Q4FY24.

The profits were hit by inflationary pressures, lower beverage can shipments, softer demand for specialty products, higher energy cost, weaker macros and a non-recurring tax settlement in Brazil.

While some of the unfavourable factors will be apparent through the next 6-9 months, the sequential recovery between Q3 and Q4 suggests the worst may be over and Novelis was able to reprice contracts higher in Q4FY23.

It may be able to meet its target of pushing Ebitda per tonne to $525.

While Hindalco stock has seen a drop of 9 per cent in the last 4 sessions to Rs 405, analysts are mostly positive on the long-term prospects with various fair-value and price target calculations in the range between Rs 435 and Rs 530.