Steady rise in aluminum prices and disruption in global supply of bauxite have kept investor interest high in integrated manufacturers like Hindalco Ltd.
Analysts at Jefferies India Pvt Ltd in their note said the recent rally in aluminum prices has boosted the earnings outlook for Hindalco. He said Hindalco would benefit more from the disruption of bauxite supplies due to political issues in Guinea as it has private mines of bauxite.
Aluminum prices on the London Metal Exchange (LME) have been rising steadily, having recently hit a 13-year high of $2950 a tonne.
The risks to global supplies of bauxite, the key raw material for aluminum manufacturing, have been heightened by incidents in the West African country of Guinea. The country meets 20-25% of the global supply and political instability can significantly affect the availability of bauxite. In the background, integrated manufacturers with captive bauxite and alumina supplies are well placed. Considering the buoyancy in alumina prices and demand, the company may also sell some alumina in the open market which will add to its profits.
Meanwhile, with Hindalco’s Indian operations benefiting, prospects for its US subsidiary Novelis also remain strong. The outlook remains strong with increased demand for cans, packaging materials and auto sheets. The demand for the auto sector is increasing as companies replace steel with aluminium.
Novelis is also benefiting from increased capacity and the acquisition of Aleris. Novelis, which now accounts for nearly two-thirds of Hindalco’s consolidated operating profit, is also seeing an increase in profitability.
Novelis Q1FY22 adjusted EBITDA margin (Ebitda per tonne) had increased to $522 per tonne (up 60% year-on-year). The company has raised its EBITDA margin guidance to over $500 a tonne for FY22, up from $480-500 a tonne previously directed.
With strong support from Novelis and better prospects for Indian operations, no wonder Hindalco’s share prices have nearly doubled year-on-year. Prospects remain strong, with analysts at Jefferies raising their earnings per share forecast for FY22-23 by 7-13% on higher aluminum prices.
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