Showing its mettle: Multiple tailwinds for Hindalco stock in 2022

Firm prices, deleveraging, and supply cuts by peers among triggers

Non-ferrous metals major Hindalco Industries saw a spike in stock price as news came through of its rival Alcoa Corporation shutting down production at its plant in Spain. Alcoa is said to be shutting down the second-largest aluminium facility in Europe for up to two years due to high energy prices. This is expected to cause supply squeeze, which should benefit Hindalco.

Aluminium hit historic highs in mid-October, followed by a sharp correction which lasted until December. In December, prices rebounded by around 6 per cent for a calendar-year gain of around 40 per cent in metal prices.

The metals market has been volatile in the past three months, with investors balancing off several divergent trends. High energy prices have pushed up production costs – this is severe for copper and aluminium since ores need to be processed via electrolysis. At the same time, China has cut back on production as it pushes for cleaner air. This, in turn, has reduced supply.

However, the persistent pandemic has also meant that demand in Europe may have reduced. Everybody has their fingers crossed about the heavily-indebted real estate sector in China, since a breakdown in activity there could severely reduce demand (apart from causing more macro-issues).

Most advisories seem to think aluminium and copper prices will remain high in 2022. Consumption in 2021 has surpassed production levels and the Chinese cutting back on emission-heavy industries is likely to reduce potential supply. Plus, the US' “Biden Plan” to refurbish creaky infrastructure should create new demand.

LME Aluminium is trading at $2,780 per tonne at the moment and assuming LME prices remain at above $2,600 per tonne through calendar 2022, Hindalco will be well-placed to generate stable cash flows.

The earnings before interest, tax, depreciation, and amortisation (Ebitda) margins should also remain high. Demand in high margin segments like the automotive (auto) industry is expected to recover as the auto industry has been hit by a shortage of chips. Plus, there is stable and increasing demand in user-segments like beverages and packaging.

Hindalco has followed a consistent strategy of reducing debt, while targeting high-end markets in its capital expenditure plans. Net debt-to-Ebitda ratios have already improved to 1.9x, below the targeted levels of 2.5x by the end of 2021-22. Further deleveraging is likely.

Novelis Inc., which contributes roughly two-thirds of operating profits, is seeing rising margins after the acquisition of Aleris Corporation, which focuses on sheets and alloys for the high-margin aerospace segment.

Novelis could generate an average Editda per tonne of $542 this financial year. On the domestic front, volume consumption has recovered from a low of 1.25 million tonnes (mt) in 2020-21 to 1.29 mt in 2021-22 (estimated), which is about the same as pre-Covid levels of 2019-20. 

At a consolidated level, Hindalco has generated a 22 per cent compound annual growth rate in Ebitda over the past three financial years. There’s headroom for growth across all segments in India, given the low per capita consumption of aluminium, copper, and value-added products.

The stock closed at Rs 474. It’s up 100 per cent in the last year and up 15 per cent in the last month. Some brokerages indicate target prices of Rs 550-560 in the medium term.