The stock of Hindalco Industries Ltd. has lost its sheen on the cost side due to problems on the demand front as well as the cost of coal. Shares are down 33% from their 52-week high of March 29. Prima facie, cost concerns are likely to remain for some time amid strong domestic and global demand for coal, which pushed up its prices.
A significant portion of Hindalco’s coal is low-cost linkage coal, but this has recently declined due to increasing supply in the power sector. Hence, Hindalco has to depend on coal from e-auction or import, which is costly. The company’s cost of production had increased sequentially in Q1 FY23 and Hindalco expects it to increase further in Q2.
Slowdown in demand in the North American beverage can market has added to the crisis. The company’s wholly owned subsidiary Novelis Inc. caters to this industry. Novelis made up about 51% of Hindalco’s consolidated earnings before interest, taxes, depreciation and amortization (Ebitda) in FY22. Ball Corporation, a major customer of Novelis, has delayed construction of a new project due to lack of demand.
“North American beverages could see strong demand around 10-12% year-on-year in CY20-21. However, inflationary pressures are now taking a toll,” analysts at Jefferies India said in a September 7 report. The industry was expecting double-digit growth in 2023, but Jefferies was expected to grow at 3.4% in CY22 and 2.5- in CY22. Demand is rising by 3.0% CY23-24 versus prior forecast of 4-5%.
However, demand outlook for Novelis’ other segments such as automotive is improving as chip shortages ease.
That said, a meaningful increase in aluminum demand is significant for Hindalco. The metal’s price on the London Metal Exchange (LME) has fallen 41 per cent from its March high of $3877.50 a tonne. However, in the last one month, the price has been in the range of $2200-$2500 per tonne. Thus, cutting production in view of higher energy costs and lower aluminum prices would prevent further fall in LME prices. “Supply cut at lower prices is likely to result in a fall in prices. Despite the adverse impact on demand due to tighter monetary policy, losses in the market will continue due to reduction in capacity,” said a September 8 report by JM Financial Institutional Securities.
Hindalco shares are down 10.4% so far in CY22. Jefferies expects Hindalco’s EBITDA and earnings per share to decline 11% and 23%, respectively, during FY22-24 after two strong years. The increase in LME prices will have a positive impact on investor sentiment.
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