Hindalco declines 10% as Novelis downgrades Bay Minette project returns to 'double digits’

The share price of Hindalco Industries Ltd fell 10 percent on February 13 after its US-based subsidiary Novelis revised the return guidance for the Bay Minette project to double digits from the previous mid-teens.

The stock was trading at Rs 524.15 on the BSE, down 10 percent from its previous close, while the benchmark Sensex gained 0.01 percent to 71,078 points.

Novelis said its Bay Minette project sees a 65 percent increase in total capital cost and a one-year delay. Novelis has revised the project cost to $4.1 billion, expecting commissioning by end-CY2026 or 2HFY27.

Higher costs for civil and structural requirements are the primary reasons for the increase, as noted by Kotak brokerage. The upward revision in capital costs may lead to lower returns, shifting from 'mid-teens' to 'double digits,' according to management.

Kotak suggests Novelis won't generate any FCF over FY2024-28 based on the revised capex estimates. Additionally, there's a potential risk of further cost inflation, as the management expresses 85 percent confidence in the current estimates. As of 3QFY24, Novelis reported a net debt/EBITDA of 2.7X, and Kotak estimates it to remain range bound over FY2024-28.

The Atlanta-based aluminium rolling and recycling firm reported 23 percent QoQ decline in net profit to $121 million from $174 million a quarter ago. Revenue fell over 4 percent QoQ and 6 percent YoY to $3.94 billion during the quarter.

In 3QFY24, Novelis reported adjusted EBITDA of $454 million, in line with analyst estimates (33 percent YoY, -6.2 percent QoQ). Volumes remained stable YoY at 0.91 million tonnes (-2.5 percent QoQ), with specialties weakness offset by increased auto and beverage can shipments. Adjusted EBITDA per tonne was $499, influenced by lower sequential operating leverage due to seasonality and planned shutdowns. '

For 4QFY24, the management anticipates margins of around $525/ton, considering normalised volumes and recovering demand in the key beverage can segment.

Kotak further said robust demand persists in the aero and auto segments, with a positive outlook for the US/South American beverage market after supply chain inventory reduction. Economic pressures in Mexico, Europe, and SE Asia may impact near-term trends in the can segment. The building and construction segment faces challenges from higher interest rates and inflation, with recovery contingent on improved macroeconomic conditions. Weakness in Europe across core can/specialty segments is normalizing, but elevated energy costs remain a concern. Management maintains a margin guidance of $525 per tonne in 4QFY24, based on volume normalisation in key markets, Kotak added.