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Home / Markets / Mark To Market /  What fuels the relentless rise in Hindalco shares?

Hindalco Ltd’s shares hit fresh highs on Thursday, reiterating investors’ confidence in its prospects. The confidence stems from the fact that the company benefits from the rise in aluminium prices. Shares have surged more than 100% since January.

Aluminium prices on the London Metal Exchange (LME) have risen 46% since January to trade around $2,900 a tonne currently. The risk of reduced bauxite and a curtailment of supplies from China had pushed up prices to multi-year highs. China has announced production cuts to achieve decarbonization targets. “Shortages & higher power costs (40% in total costs) for Chinese aluminium producers, along with capacity suspensions (2 million tonnes or 5% of national capacity suspended and more likely to come) supports our bullish view on LME aluminium," said analysts at BofA Securities.

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They estimate that Hindalco could see FY23 earnings rise by 1.7% for every $50/tonne rise in LME aluminium.

The domestic operations of Hindalco benefit not only from firm aluminium prices but its captive bauxite and alumina capacities as well. Supplies of bauxite, the key raw material for aluminium manufacturing, is at risk already given the political instability in Guinea, which caters to 20-25% of global supplies. Hindalco has adequate alumina supplies and is not dependent on imports. In fact, it had recently commissioned a 0.5 million tonnes per annum (mtpa) expansion project at its subsidiary Utkal Alumina. Looking at the surge in alumina prices and demand, the company can even gain from external sales of excess alumina. Meanwhile, the company’s US subsidiary Novelis also offers a cushion from volatile aluminium prices, being a convertor of metal. Novelis contributes to more than two-thirds of operating profits for Hindalco.

A rise in demand for beverage cans, auto sheets and packaging benefits Novelis as also the reviving demand from aerospace segment. Analysts at JM Financials said that “can makers and sheet producers continue to witness strong demand across North America and Europe and price negotiations due in the second half is expected to be settled higher".

Novelis had raised its margin guidance to more than $500 per tonne for FY22 at its June quarter earnings. It had reported an adjusted Ebitda margin (Ebitda per tonne) of $522 per tonne (up 60% year-on-year) for the June quarter. This was higher than earlier guidance of $480-500/tonne. Rising scrap margins can give a further fillip to margins.

JM Financial notes that “scrap spreads form a significant portion of Novelis margins and higher spreads suggest further sequential margin expansion in Q3FY22, in our view".

The upshot is that Hindalco’s earnings estimates have been revised upwards by analysts. Robust operating performance of Novelis, deleveraging and the rise in aluminium prices have fortified Hindalco’s prospects

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