Hindalco Industries Ltd Shares Plummet 14% Following Novelis Bay Minette Project Setback

Share price of Hindalco Industries Ltd plunged 14 percent on Tuesday after its US-based subsidiary Novelis revised the return guidance for the Bay Minette project to double digits from the previous mid-teens.

The stock was trading at a decline of 13.08 percent, at Rs 501.55 on the BSE, while it fell by 13.95 percent to Rs 501.20 on the NSE during intraday trading.This plunge came in response to the unsettling news from its US-based subsidiary, Novelis, regarding the revision of return guidance for the Bay Minette project.

Novelis, the world's largest producer of rolled aluminium and a subsidiary of Hindalco, announced a significant setback in its Bay Minette project. The project, which initially projected mid-teens returns, has now been revised to double digits. This downward adjustment in return expectations stems from a 65% increase in total capital cost and a one-year delay in commissioning. The project cost has surged to $4.1 billion, with the expected commissioning timeline extended to the end of calendar year 2026 or the second half of fiscal year 2027.

CLSA, in its recent analysis, highlighted that the cost and time overrun of Novelis' green-field Bay Minette project would pose a significant challenge. Additionally, achieving a double-digit internal rate of return (IRR), which has been revised down from mid-teens earlier, will also be a formidable task, the brokerage added.

In the past five days, the Nifty Metal sectoral index declined by approximately 7%, and over the last 30 days, it saw a decrease of nearly 3%. However, within the span of six months, it surged by around 15%. Looking further back, the index recorded a remarkable 35% increase over the past year and an impressive 180% growth over the last five years.

Kotak brokerage attributed the surge in costs primarily to higher expenses related to civil and structural requirements. This upward revision in capital costs casts a shadow over the project's profitability, prompting the shift in return expectations from 'mid-teens' to 'double digits,' according to management statements.

Novelis reported a 23% quarter-on-quarter decline in net profit to $121 million in the third quarter of fiscal year 2024, with revenues dropping over 4% sequentially and 6% year-on-year to $3.94 billion. Despite reporting adjusted EBITDA of $454 million, in line with analyst estimates, Novelis faced challenges such as stable volumes, weakened specialties, and increased auto and beverage can shipments.

Looking ahead to the fourth quarter of fiscal year 2024, management anticipates margins of approximately $525 per ton, factoring in normalized volumes and recovering demand in the key beverage can segment.

While robust demand persists in the aerospace and automotive segments, Novelis faces economic pressures in Mexico, Europe, and Southeast Asia, which may impact near-term trends in the can segment. Furthermore, challenges from higher interest rates and inflation in the building and construction segment are anticipated, with recovery contingent on improved macroeconomic conditions.

Despite these challenges, management maintains a margin guidance of $525 per ton in the fourth quarter of fiscal year 2024, based on volume normalization in key markets.

Investors are closely monitoring developments surrounding Novelis' Bay Minette project and its implications on Hindalco Industries Ltd's financial performance and strategic direction in the coming quarters.