Metal stocks are rising against the tide amid a broad decline in the stock market. The Nifty Metals index has gained 11% year-on-year (YTD), outperforming other sectoral indices.
Metal prices have risen, with aluminum prices up 37% YTD (as of 4 March) on the London Metal Exchange. Aluminum production is energy intensive and the Russia-Ukraine conflict has also led to a jump in global energy prices.
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Prices are also rising due to concerns about the impact of sanctions on Russia, which produces about 6% of global aluminum. This has been a major trigger for the stocks of aluminum producing companies like Hindalco Industries Ltd. Shares of YTD, Hindalco have appreciated 30% against Nifty 500 index losing nearly 10%.
“We expect Hindalco’s FY23-24 EBITDA to grow by 3-8% and earnings per share by 5-11%, keeping in mind higher aluminum prices, partially offset by higher costs. We see Hindalco’s aluminum EBITDA/tonne (including alumina) at $1,245 in 9MFY22 and $400-600 in FY17-21 as against $1,388/$1,577 in FY23/FY24,” analysts at Jefferies India Pvt Ltd said in a report. .
On the other hand, Hindalco expects production cost to increase by 9.5% sequentially in the March quarter (Q4FY22) due to higher e-auction coal prices. However, the company is in a relatively better position as it receives a significant portion of the coal from Coal India Limited (CIL).
In the third quarter, Hindalco met about 60% of its coal requirements from CIL linkages, 26% through CIL’s e-auction, 9% through its mines and 4-5% from imports.
“With coal coming in at notified prices from CIL linkages, Hindalco will face lower energy cost inflation than thermal power smelters sourcing fuels at global prices,” said analysts at Jefferies.
Meanwhile, Hindalco’s overseas subsidiary Novelis Inc. continues to experience strong demand in the automotive, beverage can and aerospace industries. Elara Securities (India) Pvt. Ltd said.
However, the increase in the price of aluminum could lead to higher working capital requirement.
There are certainly concerns about Hindalco’s stock. “Low availability of coal in the domestic market is a major risk,” Soda said.
Also, when the current crisis eases, aluminum prices are likely to correct, which may eventually bring a reality check for investors.
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