Hindalco US arm to face margin pressure for 2-3 quarters, says Kotak Equities

economictimes.indiatimes.com:

Novelis, the US-based subsidiary of Hindalco Industries, is likely to continue seeing pressure on margins for another two-three quarters due to subdued demand in the building and construction segment, continued destocking in the can segment and weak aluminum prices, said Kotak Institutional Equities. The brokerage has an ‘add’ rating for shares of Hindalco for a target price of Rs 455, but sees them remaining under pressure in the near term.

“Stock trades at an inexpensive 5.5X EV/EBITDA FY2025E, but the uncertain outlook of Novelis’ earnings and sluggish aluminium prices should keep the stock under pressure in the near term,” analysts Sumangal Nevatia and Siddharth Mehrotra of the brokerage said. They expect Novelis’ earnings before interest, tax, depreciation and amortization at $444 per tonne in 2023-24 (Apr-Mar) and $475 per tonne in 2024-25, as compared to $478 per tonne in 2022-23.

Novelis’ profitability had surged to an all-time high of $583 per tonne in the June quarter of 2022-23. Novelis gets as much as 58% of its volume from cans, about 20% from specialty segments, about 19% from automobiles, and around 3% from the aerospace segment.

More than half of its capacities are in North and South America, while Europe and Asia constitute for the rest. The recent commentary from producers of flat-rolled products has indicated that the demand for cans is likely to remain weak in the June and September quarters, with recovery expected only later in 2023, Kotak Equities said.

The demand from the automobile segment remains strong, and while order books in the aerospace segment are at their highest level in 8 years, it may not impact Novelis much given that it gets only about 3% volumes from this segment. Shares of Hindalco