Novelis' pleasant surprise for Hindalco in Q1

The maker of value-add aluminium products reported an EBITDA of $287 million, an increase of 10%

Investors have enough reason to cheer the June quarter (Q1) results of Novelis, Hindalco’s US-based subsidiary. Not only were the results better than expected but the outlook for business and cash flow is improving. Hindalco’s share price gained 3.2 per cent on Tuesday, to close at Rs 235, following the developments late Monday night.
 
The maker of value-added aluminium products (used by the automobile industry and for making beverage cans, etc) reported an Ebitda (earnings before interest, taxes, depreciation and amortisation) of $289 million (adjusted for certain non-operating expenses/charges), an increase of eight per cent. Rupee trades at 63.6 levels to a dollar. Jefferies’ analysts said Novelis’ Q1 adjusted Ebitda (ex-metal price lag) grew 10 per cent, seven per cent ahead of their estimate. The margin continues to surprise positively, led by rising auto mix and operating leverage gain. The number was also higher than Motilal Oswal Securities’ estimate of $271 million and Kotak Institutional Equities’ $270 million. Sequentially, though, it was down one per cent.
 
The more profitable automobile segment, now for a fifth of revenue, grew 16 per cent over a year. There could be some minor bumps in the near term but automotive aluminium sheet demand is projected to grow at a good pace, led by increased penetration. North America demand is seen growing at a compounded annual rate of 13-15 per cent, Europe at 10-12 per cent and Asia at 35-40 per cent, led by China, Kotak’s analysts highlight as key takeaways from Novelis’ earnings call. Given the strong demand prospects, Novelis is evaluating more growth opportunities, more particularly in the automotive segment.
 
In the cans’ segment, another key contributor, prices have been volatile and this trend will continue. The company signing long-term supply contracts should however provide some cushion; Q1 is reflecting part of the gain from this.
 
A favourable recycling market and cost efficiencies also helped. Consequently, Ebitda per tonne increased four cent over a year to $368, marginally down $1-2 sequentially.
 

Source: Exchange

The performance was driven by North America, which accounts for nearly two-fifth of the profit. Europe (20 per cent of profit) was flat, while South America and Asia were a drag, with their profits down one-four per cent.
 
However, the outlook for aluminium demand looks healthy, with the US economy expected to gain, and Europe also showing sign of stability. A downside risk is China; on both demand and supply, and remains a monitorable.
 
For now, with aluminium prices on the London Metal Exchange (LME) gradually inching up, it should prove helpful for Novelis and more positive for Hindalco, which produces aluminium and value-added products from the raw metal.
 
Novelis’ Ebitda and cash flow forecast provide further confirmation. It expects Ebitda of $1–1.15 billion and free cash flow (post capital expenditure) of $400-450 million in FY18, an increment over $1.08 billion and $361 million (Jefferies estimate) over FY17.
 
Hindalco’s results, scheduled this week, should provide further cues for the stock. Seven of the eight analysts polled by Bloomberg (on Monday and Tuesday) have a ‘Buy’ rating on Hindalco, with an average price of Rs 261.