Novelis Offers A Positive Surprise For Hindalco Amid Virus Disruption

Hindalco Industries Ltd.’s U.S. subsidiary Novelis Inc. reported better-than-expected operating income in the quarter ended March despite the disruption caused by the Covid-19 pandemic.

Novelis, a supplier of aluminium for beverage cans and automotive companies, reported adjusted earnings before interest, tax, depreciation and amortisation of $383 million in the three months ended March, registering a growth of 7 percent from a year earlier, the company said in a statement. Most brokerages estimated $334-350 million.

The standalone numbers do not include Aleris Corp.’s financials, which Novelis will start reporting when publishing earnings for the ongoing quarter. Higher operating income is expected to reflect positively in the earnings of parent Hindalco. CLSA expects 77 percent of Hindalco’s 2019-20 Ebitda to come from Novelis.

Novelis said its operating income was aided by a favourable product mix, lower metal and other operating costs, lower non-production expenses and a favourable foreign exchange.

That came despite a 7 percent year-on-year decline in shipments. Net profit, however, tumbled 79.4 percent year-on-year to $63 million.

Even after excluding the positive impact of contractual customer obligations, Ebitda stood at $354 million, down 1 percent year-on-year and up 3 percent over the previous quarter, IDFC Securities said in a note. That suggests unless automakers impose force majeure, Novelis may charge penalty, which reduces risk of lower earnings in FY21 amid a fall in auto volume, it said. The brokerage sees that providing a cushion to Hindalco.

Here’s what the management said in the conference call:

• Quarterly guidance of Ebitda of $420-440/tonne not sustainable amid Covid-19.
• It temporarily shut down some of the plants to adjust to customer demand.
• Cut capex guidance by $100 million for FY21.
• Plan to reduce $215 million of operating costs for FY21.
• Operations chains in China have started opening since March.
• Europe supply chain resumption offers some opportunity of growth.
• No timeline for finding a buyer for Lewisport; in talks with U.S. authorities.
• Lewisport’s fully ramped up Ebitda could stand at $120 million.
• Beverage can demand is recession resistant.

Also Read: Hindalco Completes $2.8-Billion Buyout Of Aleris

On Thursday, Hindalco shares fell 0.25 percent to Rs 118.30 apiece on the National Stock Exchange while the benchmark Nifty 50 shed 0.78 percent to end the day at 9,199.05 points.