Aluminium firms await respite

Proposed safeguard duty will have limited benefits for majors here; prospects hinge on upside in prices

Indian steel companies have seen their fortunes swing back after implementation of the minimum import price but aluminium majors await similar triggers. The recommendation of the Directorate General of Safeguards for a provisional safeguard duty of five per cent ad valorem for 200 days had lifted sentiment but this has subsided, with the Street cautious on implementation and its benefits.

Prices on the London Metal Exchange had touched $1,660 a tonne in end-April and are now about $100 less. Thus, it is not surprising that Hindalco, National Aluminium and Vedanta’s stocks have fallen by nine to 13 per cent in the past fortnight.

  Analysts believe the respite and benefits from imposition of the safeguard duty will be limited. For one, even if it is imposed, price rises in the domestic arena might not be so much, given the excess capacity. India Ratings and Research says safeguard duty is likely to provide modest protection to domestic companies from cheaper import but is unlikely to push up margins significantly.

They believe metal producers are unlikely to realise price increases equivalent to the safeguard duty — there are structural issues such as over-capacity, import pressure and weak demand. Also, producers are exporting about a third of their produce and this will not see any benefits. The proportion of exports is likely to increase to 40 per cent in FY17, with expanded capacities.

Analysts at Kotak Institutional Equities have a similar view. They say a provisional safeguard duty on aluminium imports will aid earnings of domestic companies, though a low duty rate and high export sales will mean only a moderate upside. But, if the provisional duty is extended to two or three years, they do estimate a three to five per cent upside in operating earnings for 2017-18 for Hindalco and Vedanta, and a nine to 14 per cent increase in the fair value of the stocks.

Nevertheless, they maintain a cautious stance on pure-play aluminium names, due to weak industry fundamentals. In this backdrop, the prospects hinge on pricing, wherein the general view is of caution due to slowing demand in China.

Further, India Ratings expects China to add 3.5-4 million tonnes in the year ahead of efficient capacities.

While there are hopes of a pick-up in domestic aluminium demand during FY17, high imports and low international prices might thus prevent capacity utilisation of Indian players from rising sharply. Thus, a meaningful upside in international and domestic prices is needed to drive up their fortunes.