Cash flow concerns likely to keep Hindalco's stock under pressure

The hike in capex projections at Novelis and the fire at one of its plants have impacted its parent Hindalco’s stock price adversely. Novelis (a 100 per cent subsidiary of Hindalco) has revised the Bay Minette, Alabama project cost to $5 billion from earlier guidance of $4.1 billion and initial estimate of $2.5 billion.

 

This implies around 7.3 per cent  post-tax return on capital employed or RoCE, apart from risks of more overruns and concerns about execution. Earnings and free cash flow in the next few quarters may also be under pressure due to the fire incident and tariff-related fears. The net debt stands at $5.8 billion in Q2FY26, up from $5.2 billion quarter-on-quarter (Q-o-Q).

 

Novelis’ Q2FY26 adjusted operating profit of $422 million (operating profit $448 per tonne) was impacted by the Oswego fire accident. The total impact of the fire is estimated at $550-650 million ($100-150 million on operating profit with the rest written off as exceptional items).

 

The entire cashflow impact will be visible in H2FY26 though management is guiding for 70-80 per cent loss recovery in insurance. The upwards revision of Bay Minette capex implies an internal rate of return (IRR) drop and debt to increase and debt to operating profit ratio at 4.0 times. Add in trade war uncertainty, and analysts are downgrading since FY26 will be a disappointing fiscal.

 

Novelis’ Q2FY26 adjusted operating profit was $416 million down by 9 per cent year-on-year (Y-o-Y) while reported operating profit per tonne stood at $448, down by 8 per cent  due to negative tariff impact. Shipments were at 904 kilotonnes or Kte, flat Y-o-Y and an impact of $21 million was recognised in Q2 related to the Oswego fire. The total impact in H2FY26 as mentioned above is expected to be $550-650 million with 70-80 per cent recoverable through claims.

 

Geographically, the operating profit in the US was at $133 million, down 27 per cent Y-o-Y and South America operating profit came in at $119 million, down 10 per cent and Europe at $70 million, down 22 per cent and Asia at $93 million, up 1 per cent. Novelis has increased the cost savings guidance from $100 million to $125 million for FY26 and maintained the long-term cost takeout guidance of $300 million by FY28.

 

The upwards revision of capex implies low return profile while additional capex for Oswego repairs, higher working capital requirements and cashflow squeezes could lead to further stress. The company is hoping for higher commodity prices to help it tide through this situation.

 

The Novelis’ Q2FY26 performance was sequentially better but operating profit/tonne remained below $450/tonne, much lower than past four-year average of $500 per tonne. There is no sight of tariff war ending, and thus, the target of $500 million operating profit per tonne looks out of reach in the near-to-medium term. The management had previously cited a long-term operating profit per tonne target of $600 million (once Bay Minette ramps up). The commissioning of Bay Minette and captive coal could be positive triggers but only likely in FY28.

 

Management clarified that the fire at the Oswego plant (no casualties) will have a negative impact of $100-150 million on operating profit in H2FY26 (majority in Q3FY26) due to the Oswego outage. The guidance is for a negative free cash flow impact of $550-650 million in FY26.

 

In Q2FY26, the adjusted operating profit per tonne was impacted by a net negative tariff of  $54 million. Without tariff, the operating profit per tonne would have been $506 per tonne. Net income grew 27 per cent Y-o-Y on favourable price trends. Aluminium scrap was higher Y-o-Y and in North America, supply and local market premiums have increased.

 

A three-year cost efficiency initiative announced earlier this year, to save $300 million plus, is progressing. The FY26 cost rationalisation guidance improved to $125 million. The recycling plant in Bay Minette is on track with an expectation to commission the cold mill in Q4FY26 and the rest to be commissioned in H2FY26. Shipments will start in FY27. But the total project cost is estimated at $5 billion due to inflation, higher complexity of project and machinery.

 

The expected future capex is of the order of $1.9-2.2 billion (including $300 million of maintenance capex) in FY26. Management has set aside $60 million as tariff impact for each quarter. By end-Sep '25, the net leverage was 3.5 times and liquidity was at  $2.9 billion with expected net leverage of 4.0 times in Q3FY26.

 

Analyst downgrades may be further justified on fears of possible adverse moves in LME aluminium trends or lower than expected spreads at Novelis and slower than expected ramp up of Indian downstream capacity at Hindalco.