Hindalco shines on high aluminum prices

Nevertheless, aluminum prices on LME have increased by 19% so far in CY22 (as of March 17th). There are two main reasons for the increase in aluminum prices. One, the Ukraine conflict has resulted in a rise in energy prices which has an impact on the production of aluminum as it is an energy intensive metal. Second, sanctions on Russia are a cause for concern as it is the second largest exporter, analysts at JM Financial Institutional Securities Ltd said in a report on March 15. In addition, the supply chain was disrupted by Russia’s invasion of Ukraine.

Owing to these factors and multi-year low LME inventory at 0.75 million tonnes, analysts at JM Financial believe that the current higher levels are likely to prevail.

Meanwhile, the demand environment is strong with this metal being widely used in most sectors such as the automotive, beverage cans and aerospace industries. But rising oil prices mean rising costs.

In this scenario, Indian producers are placed in a comparatively better position in terms of energy requirements as a significant portion of coal is being sourced through Coal India Limited (CIL) linkages or captive mines.

Hindalco In the December quarter (Q3FY22), CIL received 60% of its coal requirements from linkages. “The outlook for Hindalco remains bullish, a) Novelis Inc. (Hindalco’s overseas subsidiary) – continues strong LME-scrap spread b) India aluminum continues to benefit from higher realizations c) addition of Meenakshi and Chakala coal mines Focus on de-leveraging (short-term working capital requirements to grow) to enhance coal security and d) strong free cash flow generation and contain net debt/EBITDA,” the JM Financial report added. Ebitda is earnings before interest, taxes, depreciation and amortization.

Unsurprisingly, Hindalco shares are up 21% so far in CY22. Overall, the strong outlook on Aluminum could well support the stock’s valuation at current levels, with significant appreciation post-limiting near-term upsides.