Hindalco shares gain after Novelis' optimistic commentary but concerns remain

Shares of Hindalco Industries Ltd. gained in early trade on Wednesday, May 20, after its wholly-owned subsidiary Novelis reported its fourth quarter results, wherein its operational numbers improved and the company guided for better times ahead.

How Did Novelis Fared In Q4

Novelis' shipments during the quarter declined to 844 Kilo Tonnes (KT). That's a 12% decline from the 957 Kilo Tonnes (KT) reported during the same quarter last year. The figure was marginally higher than the 809 KT reported during the December quarter. Novelis had estimated shipments to be 73 KT lower due to the Oswego unit fires.

On the operational front, Novelis' Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) stood at ₹544 per tonne, higher than the ₹494 per tonne last year and ₹430 per tonne in the previous quarter.

The company's EBITDA on an adjusted basis fell 3% to $459 million, impacted by a $53 million negative impact due to the Oswego fires and another $27 million due to tariffs. This was partly offset by Sierre Flood Insurance recoveries worth $41 million.

Net loss attributable to the common shareholder stood at $84 million, while Net income is attributable to the common shareholder, excluding special items, $227 million, down 13% from last year.

The company exited FY26 with over $200 million run rate in cost savings from the global cost efficiency programme. It is targeting for that number to reach $300 million in FY27 and to $350 million - $400 million by the end of FY28.

Guidance

Novelis is expecting capital expenditure for the financial year 2027 to be in the $2.1 billion to $2.4 billion range, including $350 million for maintenance capex.

The company is also hopeful of free cash flow positivity to return by the end of the ongoing financial year.

Novelis expects to restart its fire-impacted New York facility in the next few weeks. The full commissioning of Bay Minette plant remains on track by the end of the ongoing calendar year.

The total free cash flow impact of both fires, before insurance, is approximately $1.7 billion compared to the previously projected range of $1.3 billion - $1.6 billion. Adjusted EBITDA is impacted by $100 million to $150 million, while shipments worth 150 KT to 200 KT are impacted.

The company expects to recover 70% to 75% of the cash flow and adjusted EBITDA impacted through insurance in the future periods.

Debt Concerns

The concern amidst the Novelis' optimistic commentary is the rising debt.

Net Debt at the end of the quarter stood at $6,724 million from $5,176 million last year and $6,204 million in the previous quarter.

The company's Net Debt-to-Adjusted EBITDA on a trailing 12-month basis also jumped to 4.1 times from 2.9 times last year and 3.7 times in the previous quarter.

On an overall basis, the company's net debt-to-EBITDA rose to 4.1 times, the highest in 23 quarters.

Brokerage Views

JPMorgan

The brokerage has an "overweight" rating with a price target of ₹1,175 apiece.

It said Novelis' commentary ticked most boxes as the Oswego plant will restart slightly before the June-end timeline and the Bay Minette project cost and timeline remain on track.

The management sees a strong pipeline in automotive and has highlighted that the pricing environment is positive in beverage can segment. The costs are largely well-managed as Novelis is well-hedged on energy, although the scrap market may tighten once the Oswego and Bay Minette plants ramp up, the brokerage said.

While leverage ratios will deteriorate in the near-term, as expected, Novelis has guided positive FCF in the fourth quarter of FY27 with no further parental equity infusion, it said.

JPMorgan said it believes investors will now monitor the pace of the Oswego plant's volume ramp up, confidence in Bay Minette driving incremental volumes in FY28 and scrap price trends.

CLSA

The brokerage has an "outperform" rating on Hindalco with a price target of ₹1,030 apiece.

It said the adjusted earnings surprised positively, with a better FY27 outlook helped by resumption of Oswego hot mill, near-term stronger scrap spreads and benefits of cost takeout.

It said the fourth quarter adjusted EBITDA/tonne of $544 was above estimates, partly helped by stronger scrap spreads. While the scrap spreads could taper as Oswego restarts, the reported profitability should see a sharp rebound in the second half of this fiscal.

Novelis expects positive FCF generation from FY27-end and hence leverage to taper down.

Citi

The brokerage is "neutral" on the stock with a price target of ₹1,000 apiece.

It said the fourth quarter adjusted EBITDA was at $459 million (7% ahead on insurance recovery) which declined 3% from last year — tariff impact ($27 million), Oswego ($53 million, volume loss impact only); offset in part by better scrap spreads, cost efficiency and Sierre flood recoveries ($41 million).

It added that the management is confident of achieving $600 EBITDA/tonne once Bay Minette commissions.

HSBC

The brokerage has a "buy" rating and price target of ₹1,310 apiece on Hindalco.

It said Oswego will restart in the next few weeks, which is ahead of schedule. It added that Bay Minette remains on track and capex stays at $5 billion. It expects underlying earnings to improve in FY27.

Jefferies

The company has a "hold" rating with a price target of ₹890 apiece.

It said Novelis' March quarter EBITDA was just $86 million, down $84 million from last year. Its adjusted EBITDA of $459 million was 17% above the brokerage's estimate.

It added that the rising gap between reported vs adjusted EBITDA due to potential insurance recovery from the fire incident is clouding underlying business performance.

Shares of Hindalco Industries were up 1.5% at ₹1,063.9 apiece at 9.20 am on Wednesday. The stock has gained 18.9% this year, so far.

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