Should you buy Hindalco shares post Novelis' Q4 earnings?

Hindalco Industries' wholly-owned subsidiary Novelis reported an Ebitda of $514 million for the March quarter, driven by 28 per cent YoY growth in volumes, lower cost of production and improved pricing. This resulted in Ebitda per tonne of $540, which was higher than the management’s Ebitda guidance of $525 per tonne.

Following Novelis' quarterly results, Nuvama Institutional Equities has upped its FY25 and FY26 consolidated Ebitda estimates by 13 per cent and 12 per cent, respectively.

This is to factor in higher aluminium prices. In addition, the brokerage has raised its EV/Ebitda multiple to 6.5 times from 6 times earlier to factor in sustainability of Novelis’ earnings and higher profitability at Indian operation.

Nuvama said the management seems to be cautious in raising Ebitda per tonne guidance beyond $525 despite implementation of cost cutting measures done last year. Q4 numbers, it said, restore confidence in the robustness of its business model.

"We factor in Novelis’ Ebitda growth of 8.5 per cent CAGR in FY24–26E to $2,205 million. We also factor in the LME aluminium price of $2,600 per tonne for FY25/FY26, thereby inflating Indian operations’ Ebitda (11 per cent Ebitda CAGR). Despite that, our fair value is Rs 651. Monetisation of Novelis (via IPO) is keenly awaited," it said.

Kotak Institutional Equities said Novelis’ Q4 adjusted Ebitda came marginally higher than its estimate, with demand improving in America, whereas Europe and Asia remain under pressure. Demand in the aero and auto segments remains robust, whereas
destocking in beverage cans appears largely behind, it said,

"Novelis’ leverage stood at 2.3 times in FY2024; we expect it to remain below 2.5 times over the next three years, despite a pick-up in growth capex. The management maintained its near-term margin guidance of $525 per tonne, although we see an upside risk due to volume recovery and favorable scrap spreads. Maintain ADD, with unchanged earnings and FV," Kotak said.

This brokerage has a fair value of Rs 675 on the stock.

Hindalco shares are up 32 per cent in the last six months. Nuvama said it would await lower entry points to re-enter the stock. The brokerage had maintained its ‘hld’ on Hindalco but upped its target price to Rs 651 from Rs 508 earlier. The stock has run up sharply, said Nuvama while seeing limited upside ahead.

Nuvama said Novelis’ net debt fell to $4.3 billion from $4.6 billion in Q3FY24 on release of WC ($455mn), normally a year-end phenomenon.

Still, it sees higher capex ($2 billion in each of FY25/26), which it said should keep debt higher in FY25–26.

"We expect debt to rise to $5.4 billion in FY26E (net debt/Ebitda of 2.4 times). Benefits of its $4.1 billion Bay Minette project (to be commissioned by FY27-end) are likely to start accruing FY28 onwards," it said.