For the metal industry, China is a crucial market, and hence its improving economy bodes well for demand. Here, the better-than-expected growth in China’s industrial output by 4.6% year-on-year and 7.6% rise in retail sales in October is positive. Understandably, Indian metal stocks gathered momentum on Wednesday. Amid this, shares of Hindalco Industries Ltd were not immune, rising by 4% and also touching a new 52-week high. Prior to this, the stock was up 3% in 2023 so far.
View Full Image
But to keep investor sentiment intact, a significant uptick in demand for aluminium is necessary, which in turn would lift the metal’s prices. The profitability of Hindalco’s India business hinges on how aluminium prices behave on the London Metal Exchange (LME). However, triggers for an upward trajectory appear limited, at least in the near term. LME aluminium prices have been range-bound at $2,100-2,300 per tonne in the last few months. What’s more, Hindalco expects the metal’s price to be contained in this range ahead. In 2023 so far, global aluminium consumption has been flat year-on-year at 52.2 million tonnes as higher interest rates and inflation are keeping demand in check.
“We estimate the aluminium market to remain in surplus in the medium term and forecast LME aluminum price at $2,250/2,350 per tonne for FY2024/25E,” said analysts at Kotak Institutional Equities in a report on 12 November.
However, there is a small respite on the costs front for now. In the December quarter (Q3FY24), coal costs are likely to rise sequentially but other input costs are expected to drop. All in all, Hindalco expects the cost of production in Q3 to be at the same level sequentially. In Q2, Hindalco’s aluminium Ebitda rose by almost 7% sequentially, helped by lower coal costs even as price realisations dropped. Thus, better volume holds key for better margins.
On the other hand, Hindalco’s wholly owned overseas subsidiary, Novelis Inc., is on a better footing. It is on track to meet its Ebitda per tonne guidance of $525 by Q4FY24. In Q2 this measure stood at $519 per tonne and is expected to drop to $450-500 in Q3 due to plant shutdowns. Continued improvement in operations is key as Novelis formed about 60% of Hindalco’s consolidated Ebitda in the half year ended September. Also, Novelis is somewhat immune to the volatility seen in LME aluminium prices, which means stable margin comparatively. It also helps that the demand conditions are healthy for Novelis. It expects demand from automobile segment and beverage can to be firm.
However, the company is cautious of the demand environment in the building and construction segment due to seasonality and weak macros. In H1FY24, Novelis’ volumes were down by almost 7% year-on-year to 1,812 kilo tonnes.
Overall, Hindalco’s debt dropped by 2% sequentially to ₹37,613 crore. But this is 11% higher than FY23 end. The net debt to Ebitda ratio on a consolidated basis stood at 2.69x as on 30 September. “The debt levels are comforting but given Hindalco’s capital expenditure plans there is limited room for deleveraging,” said Satyadeep Jain, analyst at Ambit Capital. “However, the company appears primed to benefit from earnings recovery that we expect at Novelis through FY26. The company is allocating capital to projects that should generate returns above cost of capital,” added Jain.
For now, investors are likely to stay more tuned to news flow on how the Chinese economy is faring. Against this backdrop, the current demand conditions suggest upsides for the Hindalco stock appear few and far between.