Hindalco shares to remain under pressure as near-term headwinds weigh on Novelis

Novelis, a wholly-owned subsidiary of Hindalco, is expected to witness margin pressure over the next two to three quarters led by continued channel inventory de-stocking in the can segment, weak demand due to lack of promotional activity by beverage producers, challenging macro impacting demand in the building and construction segment and weak aluminum prices and tight scrap market keeping scrap spreads under pressure, Kotak said in a research report.

Scrap spreads remain range-bound since the past six months between $1,000/tonne and $1,100/tonne and much lower (17 percent/10 percent) versus Calender 2021/22 levels, led by lower physical premiums across geographies, reflecting weak demand and tighter scrap market on increased recycling investments.

"We calculate a scrap spread of $0.49/lb in May 2023, back to the pre-Covid range. According to our estimate, scrap spreads form 25-30 percent of Novelis' margins and have been one of the key drivers behind elevated margins in the 6-8 quarters ending 2QFY23. LME aluminum prices corrected 5 percent month-on-month in June 2023, suggesting further downward pressure on scrap spreads in 2HCY23," the note said.

Analysts estimate Novelis’ EBITDA at $444/475/tonne for FY2024/25E. "Our

consolidated EBITDA is 8-10 percent below consensus for FY2024/25E, likely led by Novelis' estimates," Kotak said.

The stock trades at an inexpensive 5.5 times EV (enterprise value)/EBITDA FY2025E, but the uncertain outlook of Novelis’ earnings and sluggish aluminum prices should keep the stock under pressure in the near term, the brokerage noted.