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Informist, Monday, Feb. 10, 2025

By Aman Aryan and Narayan Krishna

MUMBAI/HYDERABAD – Despite growing concerns about US President Donald Trump's threat to impose 25% tariff on imports of steel and aluminium from all countries, Novelis, Inc. is confident that this new duty will have little to no impact on its business. Any impact from the increased cost if the tariff proposal materialises is likely to be offset by a rise in what is known as the "Midwest premium", the Novelis management said in a post-earnings conference call with sector analysts.

"Going by historical experience, here is what happens when tariffs come broadly on aluminum. Midwest premium basically goes up dollar to dollar," a company official said. "Midwest premium" is the term for the regional price of pure aluminum, or primary aluminum, supplied to the Midwest region of the US.

However, there will be a bit of an impact on the cash flow of the company in the near term and Novelis will apply to claim exemptions from the new tariff regime, the management said. "While there will be some short-term noise around it, but exemptions are granted in all the deserving cases. Ours is a deserving case," the company said.

The US-based subsidiary of Hindalco Industries Ltd., which accounts for 60% of Hindalco's consolidated revenue, announced its December quarter earnings Monday. Novelis's net income fell 9% on year to $110 million, while its net sales rose 3.6% on year to $4.08 billion. 

Unlike the December quarter, Novelis is expected to post a better performance in the March quarter, comparable to its September quarter results, the management said. Seasonally high volumes, a favourable product mix and metal pricing, along with the benefit of new contract pricing, will aid Novelis's growth in the current quarter, it said.

Novelis plans to also work on its cost and operational efficiencies to improve margins, the management said. It expects relatively higher recycling rate for the March quarter compared with the 63% rate during the December quarter. The recycling rate was lower in the reporting quarter owing to a dip in scrap consumption.   

The flat-rolled aluminium products manufacturer's adjusted earnings before interest, taxes, depreciation, and amortisation fell 19% on year during the December quarter owing to significantly higher scrap prices and a less favourable product mix, the company said. Also, the muted automotive and aerospace segments weighed on the company's earnings. Apart from this, some plant shutdowns for maintainence affected Novelis's performance during the quarter under review, the management said.

Novelis expects the beverage packaging segment, which constituted 57% of its shipments for the financial year 2023-24 (Apr-Mar), to continue to do well with a long-term demand growth rate of 4%.

North America and South America, which account for a major part of the comany's EBITDA, saw a fall of 26% and 19%, respectively, on a year-on-year basis. The company's EBITDA also declined in Europe and Asia to the tune of 17% and 7%, respectively, Novelis said.

The company had a net cash outflow of $915 million as of Dec. 31, compared to an outflow of $517 million a year ago. However, excluding capital expenditure, it recorded a net cash inflow of $260 million as of Dec. 31, compared with $443 million a year ago. The company invested $1.2 billion in capital expenditure till December-end, the management said, and pegged the FY25 capital expenditure guidance at the lower end of $1.8 billion-$2.1 billion.

The process of commissioning the $4.1 billion rolling and recycling facility in Bay Minette, US, is expected to begin in the second half of 2026, the management said. The plant will have an annual capacity of 600,000 tonnes of finished goods. Novelis intends to fund the capital internally and through debt financing. In January, the company raised $750 million through five-year bonds with a coupon rate of 6.875%, the management said, adding that it plans to raise a similar amount by the end of the year. The company will also look to raise funds to refinance exisiting borrowings.

Given the funding requirements for the Bay Minette plant, the company expects its net leverage to peak at 3.5, possibly in FY27. After this, the company will start deleveraging, the management said. Novelis's net leverage ratio was 2.9 as of Dec. 31, according to the company's investor presentation.

On Monday, shares of Novelis's parent Hindalco Industries closed 1.9% lower at INR 596.00 on the National Stock Exchange.  End

US$1 = INR 87.47

Edited by Rajeev Pai

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