Hindalco Industries Ltd.'s international subsidiary, Novelis Inc., posted its third quarter business update earlier this week. The cues from the report indicated that the company could see its Ebitda decline by 21% quarter-on-quarter. This could hurt Hindalco's Q3 results, since Novelis is responsible for over 50% of the company's Ebitda.
Novelis accounted for 61% and 56% of Hindalco Industries' FY24 revenue and Ebitda, respectively.
However, the company's India business stands strong, and could provide immense support, according to analysts.
So which way could earnings be reported?
The Bear Case Scenario
Novelis' Q3 business update indicated that the company's Ebitda could be 21% lower QoQ to $360-$370 million. The report also showed lower possible shipments of 900-910 kilo tonne versus 945 kilo tonne last quarter.
This suggests that Novelis' Ebitda per tonne in Q3 could decline to $403 versus $489 in the previous quarter, according to Emkay Research. This would mean the company missing its earlier guidance of $525, which it reduced during Q2, due to a rise in scrap costs.
This weaker result could have an impact on Hindalco Industries, which derived 56% of its FY24 Ebitda from Novelis.
The unit will report its earnings on Feb. 12, 2025.
Novelis' pain will persist for the next two-three quarters at least, according to Emkay. Demand moderating in segments like auto and specialty seen in the previous quarter has finally caught up with Novelis as well, the brokerage said. It does not anticipate a meaningful recovery in the fourth quarter either, and currently maintains a 'sell' rating on Hindalco Industries.
The Bull Case
On the flip side, CLSA notes that Hindalco's India business remains strong, benefiting from resilient aluminum prices. The current stock price is already factoring in Novelis' headwinds and expects the international subsidiary's volume and fixed cost recovery to help profit improvement in coming quarters, the brokerage said.
Axis Securities also remains bullish on Hindalco's overall performance. The company's Ebitda is expected to grow 28% year-on-year in the October-December period and margins to improve by 131 basis points due to higher metal prices and lower power costs in India.
Of the 28 analysts tracking Hindalco, 22 maintain a 'buy', one recommends a 'hold' and five suggest a 'sell', according to Bloomberg. The average 12 month return potential on the stock implies an upside of 27.5%.
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