Novelis, an independent US-based subsidiary of Hindalco Industries and a leading producer of aluminium, is expected to face pressure on margins for at least the next two to three quarters due to weaker demand in the building and construction sector, reduced aluminium can stocking, and lower aluminium prices, according to Kotak Institutional Equities.
Kotak has granted an ‘add’ rating to Hindalco’s shares for a target price of INR 455 but foresees pressure for the near term.
Sumangal Nevatia and Siddharth Mehrotra of the brokerage commented that although stocks are being traded at an inexpensive 5.5X EV/EBITDA FY2025E yet the obscure outlook of Novelis' earnings and sluggish aluminum prices are likely to keep the stocks under pressure.
Kotak Institutional Equities expects Novelis’ earnings before interest, tax, depreciation and amortization to be lower at $444 per tonne in FY2023-24 and $475 per tonne in FY2024-25 compared to $478 per tonne in FY2022-23.
Novelis yields about 58 per cent of its business from aluminium cans, 20 per cent from speciality segments, 19 per cent from automobiles, and 3 per cent from the aerospace segment. More than half of its capacities are in North and South America, and the remaining are located in Europe and Asia.
The recent commentary from Novelis has indicated that the demand for aluminium cans will most likely remain weak in Q2 and Q3 of FY2023 but is expected to recover in late 2023. On the other hand, the demand from the automobile segment will remain strong as order bookings in the aerospace industry are at an 8-year high. However, it may not significantly impact Novelis as the company generates only 3 per cent of business from this segment.
On Friday, June 30, Hindalco’s shares closed at INR 420.95 on the National Stock Exchange, 2 per cent higher than the earlier close.
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