Novelis' strong Q3 show, despite challenges, boosts Hindalco's prospects
Premium- Novelis remains upbeat on demand across segments and has maintained its margin guidance of $500 per tonne. The same should boost the confidence of investors of Hindalco
Novelis Inc. the US subsidiary of Hindalco Ltd, managed to post a decent show in the December quarter, despite multiple challenges. Covid-related disruptions across various markets continued to pose challenges in a seasonally weak quarter. The company’s shipments were also hit due to semi-conductor shortages faced by the automotive industry in North America and other regions.
Supply chain bottlenecks and unplanned downtime in South America were cited as other reasons that hurt sales volumes. The company’s shipments at 930,000 tonnes remained flat year on year and fell 4% sequentially. Notably, volumes missed analysts’ expectations. Analysts at Motilal Oswal Financial Services Ltd (MOFSL) had pegged volumes at 960,000 tonnes.
Despite the volume expectation miss, the company still saw net sales grow 33.5% year-on-year and 5% sequentially, thanks to the favourable pricing environment, and product mix.
Operating performance also remained robust and Ebidta per tonne at $544 was better than $537 seen in the year ago quarter. What further added to confidence is that Novelis remains upbeat on demand across segments and has maintained its margin guidance of $500 per tonne. The same should boost the confidence of investors of Hindalco.
Following the strong Q3 show by Novelis and taking into consideration aluminium price outlook on LME, analysts at MOFSL have raised their FY22 and FY23 earnings estimates for the company by 19.6% and 15% respectively. The Hindalco stock, post-Novelis results, saw intraday gains of up to 1.9% in morning trades on Tuesday.
Moving forward, growth prospects remain favourable too. With newer facilities for beverage cans being set up, can sheet market continues to attract strong demand, say analysts. The company expects demand to grow by 5% in CY22. Favourable housing fundamentals in the US and Europe are driving strong speciality business demand. Aerospace order book also remains strong. It is the automotive segment that may still see some uncertainties during the calendar year 2022.
Among other positives, the company, post Aleris acquisition, has achieved combination synergies run rate of $107 million and is on track to hit $220 million with the installation of a recycling centre in China.
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With good cash flows, the company continues to see regular debt reduction. The net debt to Ebitda at 2.3x at the end of Q3 was much better than 2.9x at the end of FY21.
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