Markets
For Hindalco, lower aluminium prices a near-term drag
Summary
- Despite a stellar 31% year-on-year Ebitda growth in the June quarter, Hindalco faces near-term profitability concerns due to a drop in aluminium prices and operational disruptions in Europe.
- The company is investing heavily in downstream projects and renewable energy to sustain growth.
Hindalco Industries Ltd reported consolidated Ebitda growth of 31% year-on-year for the June quarter, driven by better price realisation, higher volumes and lower input costs. But while the company is expected to maintain its growth trajectory, the current drop in aluminium prices is expected to weigh on its near-term profitability.
Aluminium prices are hovering below $2,300 per tonne in the ongoing quarter, down from over $2,500 in June, dragged down by weak US economic data and geopolitical uncertainties.
The damage and disruption to Hindalco's plant operations in Europe due to floods may also impact the company's earnings in the second quarter.
Amid the near-term volatility, Hindalco is investing significantly across both domestic business and Novelis Inc., its US-based subsidiary.
The investments are directed primarily at increasing the share of value-added products and enhancing backward linkages. These include a flat-rolled products expansion project likely to get commissioned by March, which would take Hindalco's total downstream capacity to 600,000 tonnes per annum.
Hindalco’s extrusion facility at Silvassa for converting raw aluminium into other value-added grades is running at about 40% of its capacity. It is projected to reach full capacity by the fourth quarter (January-March).
The company’s management has projected Ebitda of $200 per tonne at peak downstream capacity, up from about $140 per tonne currently.
A massive investments pipeline
Hindalco is also investing in building a renewable power generation capacity of 300 MW with a 100 MW hybrid project, including pumped storage, which is expected to be commissioned in the first half of 2025. The project is important to the company’s growth plans since it wants to build its new smelter based on uninterrupted power supply from the renewable source.
However, Hindalco faces hurdles in its plans to lower its dependency on coal because of delays in obtaining licences for mining from its coal blocks.
The company also commissioned a new automotive recycling plant in Novelis in the first quarter, increasing its recycling capacity. Expansion projects in Novelis include a greenfield recycling project in the US.
Also read | Proposed Novelis IPO is a booster dose for Hindalco
With the domestic downstream projects closer to completion, Hindalco is now looking at its next set of projects. These include an alumina refinery, an aluminium smelter, and a copper cathode plant, each requiring about ₹8,000 crore of investment.
The copper cathode plants would increase Hindalco’s backward integration as it currently imports copper cathode, which are processed further to be sold as copper rods. Between April and June, the company imported nearly 25% of its copper cathode requirement.
Hindalco’s estimated total investment stands at close to ₹70,000 crore (about $8.5 billion), including $4.9 billion in Novelis.
The aluminium factor
What augurs well for the company is that despite the high capital expenditure Hindalco is projected to maintain a comfortable balance sheet position.
“We expect net debt to increase to ₹41,000 crore by FY26-end as company undertakes more than ₹20,000 crore annual capex over the next couple of years. That would still imply consolidated net debt/Ebitda of 1.2-1.3 through FY26-27," Ambit Capital said in a report.
Hindalco’s consolidated net debt at the end of the June quarter was ₹35,500 crore. Net debt/Ebitda was 1.24 times, down from 1.73 times a year ago.
Last quarter’s Ebitda increase was led by a sharp 74% growth in domestic aluminium segment and a 52% growth in the copper segment, although Novelis clocked a lower growth of 19%.
Domestic demand for aluminium rose sharply by 19% in the first quarter, with imports, excluding scrap aluminium, jumping by 35%. Novelis accounts for nearly 60% of consolidated revenue even though it has a higher cost structure due to the absence of backward linkages.
While Hindalco’s shares have risen nearly 38% over the last one year, the stock has witnessed sharp volatility, in line with aluminium prices. The stock trades at 6 times its enterprise multiple (enterprise value/Ebitda) and 1.3 times the estimated FY26 price-to-book, Motilal Oswal Financial Services said in a report dated 13 August.
Stronger aluminium prices are the key to the Hindalco stock’s good health.
