Hindalco earnings beat as Novelis recovers and aluminium volumes support outlook

Investment View and Valuation

Motilal Oswal Financial Services (MOFSL) retained its Buy rating on Hindalco following a material 1QFY27 earnings beat and raised its estimates. The broker expects a strong earnings outlook for Hindalco’s India operations, while Novelis is expected to recover from the Oswego fire-related volume disruption and the additional customer-servicing costs that followed it.

MOFSL expects aluminium-price weakness, with prices reversing to USD3,200 per tonne from a Middle East crisis peak of USD3,850 per tonne, to soften India and Novelis earnings in 2H FY27. However, it expects a strong volume outlook to provide support.

MOFSL’s sum-of-the-parts target price is Rs 1,220, based on FY28E EV/EBITDA multiples of 7 times for Hindalco India and 7.5 times for Novelis. The valuation incorporates net debt of Rs 446 billion and applies a 10 per cent discount to quoted investments. At the report CMP of Rs 1,060, the stock traded at 6.7 times FY28E EV/EBITDA and 1.6 times FY28E price to book.

1QFY27 Financial Performance

Hindalco reported consolidated 1QFY27 net sales of Rs 848 billion, up 32 per cent year on year and 9 per cent quarter on quarter, exceeding MOFSL’s Rs 775 billion estimate, primarily due to favourable metal prices. Consolidated EBITDA was Rs 139 billion, up 76 per cent year on year and 40 per cent quarter on quarter, versus the broker’s Rs 106 billion estimate. Adjusted PAT was Rs 87 billion, up 118 per cent year on year and 51 per cent quarter on quarter, compared with the Rs 56 billion estimate.

The company recorded an exceptional cost of Rs 23 billion, or USD244 million, relating to the Oswego fire after insurance and other recoveries. Business-interruption insurance recoveries of Rs 4.5 billion, or USD47 million, were recorded in other income.

Segment Performance

Aluminium

Upstream aluminium revenue was Rs 134 billion, up 44 per cent year on year, while EBITDA rose 81 per cent to Rs 73.9 billion, or USD2,331 per tonne. Performance was aided by favourable market conditions and stronger operations. Upstream aluminium sales increased 3 per cent year on year to 335kt.

Downstream revenue was Rs 49 billion, up 46 per cent, and downstream EBITDA was Rs 3 billion, up 30 per cent. Downstream EBITDA per tonne rose 15 per cent year on year and 25 per cent quarter on quarter to USD303, supported by an improved product mix and premiumisation. Downstream sales increased 3 per cent to 104kt.

Copper

The copper business delivered revenue of Rs 172 billion, up 16 per cent year on year on higher average copper prices. EBITDA was Rs 9 billion, up 36 per cent year on year and 1 per cent quarter on quarter, supported by operations and higher sulphuric-acid by-product realisations despite major planned smelter maintenance.

Copper metal sales fell 16 per cent to 105kt, while CCR sales declined 8 per cent to 96kt.

Novelis

Novelis reported revenue of USD5.8 billion, up 23 per cent year on year and 21 per cent quarter on quarter, compared with MOFSL’s USD4.8 billion estimate. The performance reflected higher aluminium prices, partly offset by an estimated 33kt shipment loss from the Oswego disruption.

Total rolled-product shipments were 916kt, down 5 per cent year on year but up 9 per cent quarter on quarter. Adjusted EBITDA was USD516 million, up 24 per cent year on year and 12 per cent quarter on quarter, exceeding the USD422 million estimate. The result was helped by lower aluminium scrap prices and cost efficiencies, and included an approximately USD18 million net positive Oswego-fire impact, including business-interruption insurance proceeds.

Adjusted EBITDA per tonne was USD563, up 30 per cent year on year and 4 per cent quarter on quarter, versus the USD480 estimate. North America EBITDA fell 17 per cent year on year because of Oswego, while Europe, Asia and South America grew 44 per cent, 30 per cent and 56 per cent, respectively.

Management Outlook and Execution Priorities

Management indicated that near-term downstream EBITDA of USD250 per tonne is more sustainable, while long-term guidance remains above USD300 per tonne as capacity ramps up. It expects 2QFY27 copper EBITDA to be broadly in line with 1QFY27, as elevated sulphuric-acid prices offset negative treatment and refining charges.

Management also expects aluminium production costs to rise another 5–6 per cent quarter on quarter in 2QFY27 because of seasonal coal-price inflation. India is entering a high-capex phase, and management expects leverage to remain broadly stable through FY27.

Key execution drivers include:

• Aditya refinery and smelter expansions.
• Ramp-up of Aditya FRP.
• Qualification of battery-foil and AC-fin facilities.
• Copper-smelter expansion.
• Commissioning of the copper scrap-recycling project targeted for FY27.

Estimates and Key Risks

MOFSL increased its FY27 revenue, EBITDA and adjusted PAT estimates by 9 per cent, 22 per cent and 33 per cent, respectively. For FY28, it raised revenue, EBITDA and adjusted PAT estimates by 4 per cent, 6 per cent and 12 per cent, respectively.

The report identifies the following risks and constraints:

• Aluminium-price volatility.
• Oswego recovery and volume disruption.
• Potential supply additions when aluminium prices are high.
• Elevated coal costs.
• Negative copper treatment and refining charges.
• Capex-related leverage.