Hindalco Industries Ltd., part of the Aditya Birla Group, faced a significant market reaction on Thursday, November 7, as its stock plummeted by 6.5%. This sharp decline followed Novelis Inc., Hindalco’s US-based subsidiary, withdrawing its short-term EBITDA per tonne guidance for the upcoming quarters. The announcement was made post-market hours on Wednesday, creating an immediate negative sentiment in Thursday’s trading session, causing Hindalco to become the top loser on the Nifty 50 index.

The drop reflects investor concerns over Novelis' performance, which contributes approximately 67% of Hindalco’s overall EBITDA. Such a heavy dependence on Novelis means that any challenges faced by the subsidiary significantly impact Hindalco’s financial health and stock market perception.

Reasons Behind Novelis' Guidance Suspension

The primary reason cited for Novelis' suspension of its short-term EBITDA guidance was the tightening of aluminium scrap spreads. China’s accelerated purchase of aluminium scrap led to an increase in scrap prices, disrupting the raw material cost balance for Novelis and affecting its EBITDA margins. This shift has resulted in the following impacts on Novelis and, by extension, Hindalco:

• Increased Aluminium Scrap Prices: China’s policy liberalization allowed for higher aluminium scrap imports, causing scrap prices to rise sharply. This price hike has constrained Novelis' profitability, reducing its anticipated margin levels.

• Operational and Seasonal Challenges: Novelis’ EBITDA was also affected by a $25 million expense due to flooding in its Sierre facility, highlighting unforeseen operational challenges. Furthermore, the December quarter is seasonally weak for the aluminium industry, which may add to the pressures on Novelis' profit margins in the short term.

Performance Metrics and Financial Impact

For the recently concluded quarter, Novelis reported an EBITDA per tonne of $498, a decline from both $519 in the same quarter last year and $525 in the preceding June quarter. The reduction reflects the growing challenges within the aluminium sector, especially with rising raw material costs.

The lower EBITDA figures are also due to factors such as:

• Lower Automotive Shipments: A less favourable product mix, impacted by lower automotive shipments, resulted in a dip in profitability.
• Increased Debt Levels: The net debt for Novelis rose to $4,760 million, up from $4,629 million in the June quarter. Increased debt levels indicate higher financial pressure, potentially leading to additional cost-cutting measures or capital management strategies.

Market Reaction and Future Outlook

With the 67% EBITDA contribution from Novelis, Hindalco’s market performance closely follows that of its subsidiary. The stock’s 6.2% intraday fall to ₹664.4 represents a 14% decrease from its recent peak of ₹772, reducing Hindalco’s year-to-date gains to around 9%.

Looking ahead, Novelis' management anticipates that headwinds from increased scrap prices will continue to challenge the company in the December and March quarters. Additionally, seasonal weakness in the December quarter may contribute to earnings volatility. Investors in Hindalco are closely watching these developments, with further share price adjustments likely if these issues persist or worsen.

Conclusion

The current decline in Hindalco’s share price underscores the critical role Novelis plays in Hindalco’s overall valuation and growth. The volatile aluminium market, increased debt, and seasonally weak quarter are key concerns for investors moving forward. The strategic responses from Novelis, including managing operational costs and addressing scrap price fluctuations, will be pivotal in determining Hindalco's medium-term stock performance.

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