Hindalco shares tank 14% on Novelis’ Bay Minette return guidance. Should you buy?

Shares of Hindalco Industries tanked 14% to the day’s low of Rs 501.10 on the NSE on Tuesday after its US-based subsidiary Novelis lowered its returns guidance for Bay Minette project to double digits from an earlier mid-teens. The company also announced an additional capex for the project which came as a shocker for the Street.

On Monday, Novelis reported net income at $174 million which was up 81% year-on-year (YoY) though it excluded special items, the company filing said. The adjusted EBITDA was reported at $454 million which was up 33% YoY. The company reported net sales at $3.9 billion for the third quarter of fiscal year 2024, which decreased 6% versus the prior year period driven by lower average aluminum prices as shipments were in line with prior year levels.

Read More: Hindalco Q3 results today: After strong Novelis show, what should D-Street expect from the aluminium major

Here’s what brokerages recommended:

Kotak Equities: Add | Target: Rs 535

Kotak has recommended an ‘Add’ rating on Hindalco Industries for a price target of Rs 535. The brokerage has expressed a surprise on the Novelis—capex front. The December quarter earnings were in line with its estimates.

Novelis’ 3QFY24 adjusted EBITDA came in line with its estimates with the demand outlook improving in America, whereas Europe and Asia remain under pressure. The company has revised the capex outlay upward for its key growth project—greenfield expansion in North America — by 65% to US$4.1 bn and delayed the timeline by one year to end FY2027E. Management has downgraded the return guidance from this project to ‘double digits’ from ‘mid-teens’ earlier. Cost inflation and delay do not impact our explicit earnings forecast until FY2026E, but damage the growth, earnings and return prospects of the company from a 5-year perspective, Nuvama said in a note.

JM Financial: Buy | Target: Rs 610

JM Financial has maintained a buy view on the counter for a price target of Rs 610. The stock remains one of its preferred bets.
Novelis reported 3Q adjusted EBITDA of $454 mn which was higher than JM’s estimates of $437 mn. EBITDA outperformance was due to lower-than-expected raw material costs, it said in its stock review note.
The brokerage also highlighted key takeaways from the call which included a revision in its capex guidance for its Bay Minette plant from $2.7-2.8 bn to $4.1 bn, up 52%.

A significant escalation in projected cost for the Bay Minette plant is likely to result in lower IRR, it said.

Though, in JM’s view, earnings trajectory is likely to benefit from tracking plant commissioning, increased recycling and evenly spread capex (due to delay in Bay Minette plant commissioning) resulting in higher shipments and margins keeping its journey of sustainable EBITDA/t of US$525/t intact.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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