Novelis' Weak Earnings Raise Concerns For Hindalco Ahead Of Q2 Results

Hindalco Industries Ltd.'s share price fell over 7% on Thursday after its international subsidiary Novelis Inc. reported weak second-quarter results and commentary from its management.

Novelis, the US-based aluminium company, after reporting a 18% year-on-year decline in net profit to $128 million in the quarter ended September 2024, said it has suspended its near-term Ebitda per tonne guidance. This would have a negative impact on parent Hindalco Industries, which is due to report its second quarter earnings on Nov. 11.

Novelis, a subsidiary of Hindalco Industries, which was acquired in 2007, has become a global leader in aluminum recycling and rolling and is known for its sustainable aluminum solutions.

The importance of Novelis stems from the fact that it accounted for 61% of Hindalco Industries' total revenues and 56% of its total Ebitda as of fiscal 2024.

• Net sales up 5% at $4.3 billion versus $4.1 billion.

• Adjusted Ebitda down 5% to $462 million.

• Adjusted Ebitda up 1% excluding $25 million net impact of Sierre flooding.

• Net profit down 18% at $128 million versus $157 million.

Novelis' second-quarter earnings were mainly impacted by the $61 million charges due to production interruptions at Sierre plant. The company expects these plant interruptions, caused by flooding in the area, to persist until the end of 2024.

Earnings of the company were also impacted by higher restructuring and impairment expenses and lower operating performance.

Novelis, after reporting its second-quarter earnings, said that it has suspended its-near-term adjusted Ebitda per tonne guidance. The company plans to wait until further clarity on metal markets and expects margins to contract sequentially in the second half of fiscal 2025. This will likely have a negative impact on Hindalco Industries' overall growth in the second half of the current financial year.

Novelis suspended its near-term margin guidance on account of rising aluminum prices.

Intensifying competition for scrap aluminum largely from the liberalisation of scrap importation policies in China, has been significantly increasing the price of scrap aluminum inputs, stated the company. This stands negative for Novelis' adjusted Ebitda since its products contain 60% recycled content, and higher scrap prices would increase their input costs, thereby impacting margins.

The company does note, however, that it does have initiatives underway to protect their benefit from utilising scrap aluminum over time. The company is using new technologies to diversify and expand their scrap inputs and is also increasing pre- and post-consumer scrap.

Novelis has also projected a mixed demand outlook for the future. While the company does maintain a positive demand outlook for cans and North American autos, it does see weakness in Europe's auto segment.

The company also noted that the softer auto industry dynamics are impacting auto speciality product demand, such as for EV batteries and rucks/trailers. Novelis' FY24 shipments included 19% of speciality products.

The company expects 4% year-on-year growth in shipments in fiscal 2025.

Shares of Hindalco Industries were trading 6.67% lower at Rs 661 apiece as of 10:15 a.m., compared with a 1.06% decline in the benchmark BSE Sensex.