Future looks bright for Hindalco, and Ukraine war may have a part to play

Higher aluminium prices, tighter supplies and lower debt are positive triggers

Traders will note that Hindalco and other industrial metals producers have bucked the downtrend in the global markets as the Ukraine crisis escalated into war. While the Nifty is down 1.8 per cent in the last month, Hindalco is up 17 per cent. There are similar counter-cyclical returns from other metals companies.

There are several variables to consider in assessing this situation. Russia is a major metals exporter, accounting for 10 per cent of global aluminium exports, 13 per cent of steel exports. It also holds significant market share in copper, zinc, etc. as well as palladium. Ukraine is also a steel exporter.

Global demand may ease due to the likely downgrade in GDP growth caused by the conflict. Also, energy prices have escalated as well and energy is a big input in processing metals. But while it raises costs, gas and crude supply disruptions will also mean lower production.

Hence, at least in the short-term to medium-term, supply disruptions could lead to a squeeze where metals prices spike. This is already happening and if Russia remains under sanctions, it will continue. One element is that China may decide to ramp up production, which it had cut back due to its focus on emission controls. Even so, supply could remain tight. In the longer-term, demand for aluminium depends on automotive sheets, Electrical Vehicle adoption being a demand driver, beverage cans, and the Aerospace industry. However, if the crisis is quickly resolved and Russia is not sanctioned for a long period, the supply equation would change and prices would correct downwards.

For Hindalco, consolidated revenue in Q3, 2021-22 was Rs 50,270 crore (up 44 per cent YoY and up 5 per cent QoQ). The consolidated EBITDA was Rs 7,374 crore (up 42 per cent YoY, but down 4 per cent QoQ due to sequentially weaker standalone business performance in India including Utkal Alumina). The consolidated PAT was Rs 3,660 crore (up 81 per cent YoY and 7 per cent QoQ). The future looks bright since we can factor in higher LME prices in aluminium and copper going forward. There is a premium over LME prices in domestic India realisations – this was around $630 per tonne in Q3. Hindalco has hedged around 25-30 per cent of its 2022-23 aluminium production with LME futures contracts taken at around $2,360 per tonne. Hence, there’s a floor on the price in case of corrections.

Hindalco has a very strong balance sheet and it has steadily reduced debt as it has generated higher profits and cash flows. The likely Net Debt: EBITDA ratio will be 1.5x in 2021-22, down from 2.8x in 2020-21 and this is likely to fall further, to below 1x by end of 2022-23. This makes it easy to consider capex. An additional 240,000 tonnes of aluminium downstream projects are under construction.

The management commentary says production costs are likely to increase by 9-10 per cent mainly due to rising coal prices. The combined leverage and separate leverage at Novelis and Hindalco India are assessed at comfortable. Novelis was targeting 2.5x after the acquisition of Aleris and it is currently at 2.3x, which is below its target. India business will target paying down bonds of Rs 6,000 crore. Copper production volumes rose this fiscal. Hindalco is considering expanding capacity at one of its brownfield aluminium smelters. Various analysts have set targets in the Rs 635-650 range for the stock, which is currently trading at around Rs 573.