What is the expected impact on earnings per share (EPS) and free cash flow over the next 2-5 years due to interest expense?
Impact on EPS and Free‑Cash‑Flow (FCF)
Novelis’ $750 million senior‑note issuance (10‑year, fixed‑rate) adds a sizable, long‑dated interest burden to the balance‑sheet. Assuming a coupon in the 5.5%‑6.0% range (typical for senior unsecured notes with a 2025‑2026 rating), the annual interest expense will be roughly $41‑$45 million. Over a 2‑year horizon the added expense translates into roughly $0.20‑$0.25 of earnings per share (EPS) per year, assuming 2025‑2026 diluted share counts (≈ 190 M shares). In the 5‑year outlook, the cumulative hit is ~ $0.9‑$1.2 in EPS, which, when spread over the forecasted EPS growth (≈ 6‑8% YoY from the recycling‑growth tailwinds), translates to a 10‑15% downward pressure on EPS versus a no‑debt scenario.
From a cash‑flow perspective, the same $41‑$45 M of annual interest will be a direct out‑flow from operating cash before net‑working‑capital changes, reducing free cash flow by roughly $40‑$45 M each year. If the proceeds are largely deployed to expand capacity and recycle‑capacity‑linked projects, the incremental operating cash generation from those projects could partially offset the interest drain, but the net effect over the next 2‑5 years is a drag of 6‑8% on free cash flow relative to a base‑case without the issuance. Consequently, analysts typically model a ~$50 M annual “interest‑expense drag” on both EPS and FCF, which is a material but not decisive head‑wind given Novelis’s strong cash‑conversion cycle (≈ 70% conversion rate) and its 2025‑2026 free‑cash‑flow generation of ~ $500‑$550 M.
Trading Implications
The incremental interest cost is already priced into Novelis’s current credit spreads, but the EPS‑down‑drag and reduced FCF provide a short‑term catalyst for a modestly lower valuation multiple (≈ 0.8‑1.0× FY25‑26 EV/EBITDA). Traders may look for sell‑on‑weakness on any earnings surprise that fails to offset the new interest burden, while buy‑the‑dip on the back‑of‑the‑envelope upside if the capital raised is deployed efficiently into high‑margin recycling operations. Monitoring the interest‑coverage ratio (currently > 4×) and the yield spread over Treasuries (≈ 250–300 bps) will be critical for positioning. In practice, a slightly bearish stance (e.g., short‑term 1‑2% underweight) with a stop‑loss near the 52‑week high may capture the downside risk from the interest‑expense drag while still leaving upside potential if the capital deployment yields > 8% ROIC.