Home >Markets >Mark To Market >Novelis’s performance, stable prices bode well for Hindalco

Aluminium prices on the London Metal Exchange (LME) have been trading above $2,300 a tonne since the past week, a level last seen in 2018. It’s because the metal has surged about 60% from its 2020 lows.

Unsurprisingly, aluminium manufacturers will see their earnings get a boost. What’s more is that the outlook for 2021 remains strong.

Production in China is likely to remain in check because of emission control norms even as global demand is expected to increase. Demand from the US has staged a strong recovery given higher infrastructure spending, a key reason for the upbeat outlook.

Satish Kumar/Mint
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Satish Kumar/Mint

Manufacturers such as Hindalco Ltd and Vedanta Ltd may see their fourth-quarter earnings fortified because prices have averaged at $2,093 a tonne during the quarter. That is 9% higher than the average in the previous quarter and 24% higher than the year-ago level.

“We expect Ebitda (earnings before interest, taxes, depreciation and amortization) for Hindalco’s India operations to increase 4% sequentially to 1,718 crore on the back of higher LME price," said analysts at Motilal Oswal Financial Services Ltd. The brokerage expects Vedanta’s Ebitda (excluding Hindustan Zinc Ltd) to improve 13% sequentially to 5,310 crore.

Besides, Hindalco’s investors could get comfort from the reduction in debt and rising cash flows of the company.

Its US subsidiary Novelis Inc., which contributes more than 60% to its operating profit, remains on a strong footing. The growing share of Novelis’s non-cyclical business in Hindalco’s consolidated performance cushions the firm’s overall performance.

“Novelis’s share in consolidated Ebitda is likely to increase from 67% in FY20 to 69% by FY23," said analysts at Elara Securities (India) Pvt. Ltd. The rise in volume contribution of value-added products and prudent hedging strategy for India operations should ensure lower volatility in earnings, they added.

According to Elara analysts’ estimates, Hindalco’s net debt will lighten from 53,800 crore as of Q3FY21 to 39,600 crore by FY23 and return on equity will expand 540 basis points to 12.2% over FY20-23.

The capital allocation strategy announced by the firm will ensure that half of the $1-1.2 billion cash flows per annum is used for funding growth, while the balance 30% is expected to be used for debt reduction and 8-10% for retur-ning cash to shareholders.

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