Hindalco’s stock factors in optimism adequately
Premium- Hindalco’s plan to triple its downstream capacities over the next five years should help boost growth
The government imposition of anti-dumping duty on the import of flat-rolled aluminium products originating in or exported from China should accrue benefits to Indian producers. The duty will help curb imports. India has imported 57% of its demand for aluminium in the September quarter, of which about 18% is non-scrap imports, according to analysts at Motilal Oswal Financial Services Ltd. They reckon the development is positive for Hindalco Industries Ltd, which is into flat-rolled products.
Note that China trade data for November suggests a surge in aluminium exports from the country. This is when the rest of the metals saw declining exports or rising imports into China. However, aluminium exports from the country rose to 509,000 tonnes, the highest level since February 2020, according to Edelweiss Securities Ltd.
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As such, rising China exports and correction in the aluminium prices on the London Metal Exchange (LME) have been the reasons for the decline in Hindalco’s shares recently. The stock has dropped about 17% from its 52-week highs in October. In general, higher aluminium prices lead to better realizations for Hindalco. Meanwhile, the company’s domestic operations are benefiting from strong volume growth.
It had seen aluminium sales grow 12% year-on-year during the fiscal second quarter. Further benefits accrued as aluminium value-added products, contributing a fourth of overall volumes, saw 36% year-on-year growth.
Hindalco’s plan to triple its downstream capacities over the next five years should help boost growth. In addition, the completion of the expansion project in Utkal Alumina means Hindalco not only has adequate alumina supplies but can sell in the open market, too. However, rising coal prices mean that the company’s coal costs can rise about 8% sequentially during the December quarter.
Meanwhile, the company’s US unit Novelis, which contributes more than half of the company’s operating profits, remains an important growth driver. Novelis, being a convertor of metal, remains insulated from aluminium LME fluctuations. As such, strong profitability at Novelis, sustained earnings outlook in India operations, expansions and debt reduction hold Hindalco’s earnings prospects in good stead. The stock’s nearly 90% appreciation in 2021 suggests investors are capturing a good share of the optimism into the price.
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