Continuing margin expansion at Novelis keeps outlook firm for Hindalco
Premium- The company’s revenue, adjusted Ebitda, and net profit grew 59%, 101%, 116% year-on-year to $3,855 million, $508 million and $210 million, respectively
A strong June quarter performance by Novelis, the US subsidiary of Hindalco Ltd, inspires confidence in the latter’s consolidated performance, too, which is to be declared soon.
The company’s revenue, adjusted Ebitda, and net profit grew 59%, 101%, 116% year-on-year to $3,855 million, $508 million and $210 million, respectively.
The company’s shipments of 973, 000 tonnes was up 26% y-o-y. The year-on-year growth was on a weaker base of last year that was impacted by covid-19. On a sequential basis, they were comparable to 983,000 tonnes despite some seasonality impact.
Analysts say that lower demand from automotive in North America was compensated by higher volumes from other segments. The demand for cans, auto sheets, packaging material remains strong, and is expected to strengthen with economic activities catching pace.
The company’s margins also continued to shine. Novelis’ Q1FY22 adjusted Ebitda came 3% ahead of our estimate, with record margins of $522 per tonne, said analysts at Kotak Institutional Equities. Notably, these were up 60% year-on-year and 2% sequentially.
Strong demand in the can segment, ramp-up of new auto lines, and favourable scrap should keep margins high, said analysts at Kotak Institutional Equities. The company’s management, too, has guided for per-tonne Ebitda of more than $500 a tonne in FY22, which is higher than $480-500 per tonne guided earlier.
The growth for Novelis is also being driven by ongoing expansions and integration of acquisitions. Novelis achieved a synergy run rate of $100 million from Aleris acquisition in Q1FY22 as against $79 million in Q4FY21. The company is expected to see combination synergies exceeding the earlier guidance of $120 million.
The strategic synergy from the Aleris integration in China would exceed $100 million as against the earlier expectation of $65 million, said analysts at Motilal Oswal Financial Services Ltd. Novelis also has finalized its 200 ktpa expansion plan in China, entailing capex of $375 million.
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With strong margins, the rising free cash flows are accruing benefits on debt reduction, too. The company attributed cash flow improvement versus the previous year to have been driven primarily by higher adjusted Ebitda and favourable metal price lag, largely offset by higher working capital requirements, including rising aluminium prices.
The company also said that it reached its targeted net leverage ratio (net debt/trailing twelve-month adjusted Ebitda) of 2.5x at the end of Q1FY22, compared with 3.8x during the same period last year after closing the Aleris acquisition, and 2.9x in Q4FY21.
Analysts say that with strong free cash flow generation and controlled capex, deleveraging would continue. The Hindalco stock prices, which have gained more than 80% year-to-date, are trading near highs seen last week.
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