Weak demand, high costs double whammy for Hindalco Industries
PremiumHindalco’s cost of production had risen sequentially in Q1FY23 and the company expects this to rise further in Q2FY23
Hindalco Industries Ltd’s stock has lost its lustre amid problems on the demand front as well as on costs led by the price of coal. The shares are down 33% from their 52-week highs of 29 March. Prima facie, the concerns on costs are likely to stay for a while amid the strong domestic and global demand for coal, which drove its prices up.
A significant portion of the coal Hindalco sources is low-cost linkage coal, but this has dropped recently because of rising supplies to the power sector. Therefore, Hindalco has to rely on coal from e-auctions or imports, which are costlier. The company’s cost of production had risen sequentially in Q1FY23 and Hindalco expects this to rise further in Q2.
The demand slowdown in the North American beverage can market has added to the woes. The company’s wholly-owned subsidiary, Novelis Inc., caters to this industry. Novelis formed about 51% of Hindalco’s consolidated earnings before interest, tax, depreciation, and amortization (Ebitda) in FY22. Ball Corporation, a key customer of Novelis, has delayed the construction of a new project because of the demand deceleration.
“North American beverage can demand rose a strong about 10-12% year-on-year in CY20-21. However, inflationary pressures are now taking a toll," said analysts at Jefferies India in a 7 September report. The industry was anticipating double-digit growth heading into 2023, but Jefferies sees demand rising at 3.4% in CY22 and 2.5-3.0% in CY23-24 versus an earlier forecast of 4-5%.
However, the demand outlook in Novelis’ other segments such as automotive is improving with the easing of chip shortage problem.
That said, a meaningful rise in demand for aluminium is crucial for Hindalco. The metal’s price on the London Metal Exchange (LME) has fallen by 41% from the high of $3877.50 per tonne in March. But, in the past one month, the price has been in the range of $2200-$2500 per tonne. Thus, production cuts in view of high energy costs and low aluminium prices would prevent a further fall in LME prices. “Supply curtailments on low prices are likely to create a bottom for prices. Despite the adverse impact on demand because of tightening monetary policy, curtailment of capacity will ensure the market remains in deficit," said a report by JM Financial Institutional Securities dated 8 September.
Shares of Hindalco have fallen by 10.4%, so far in CY22. Jefferies expects Hindalco’s Ebitda and earnings per share to fall by 11% and 23% respectively, over FY22-24, after two strong years. A rise in LME prices would positively influence investor sentiments.
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