18 Mar , 2022 By : Kanchan Joshi
Hindalco Industries Ltd’s shares have declined by 2% on NSE over the last week as the prices of aluminium on the London Metal Exchange (LME) softened from the peak observed on 4 March and fell by 3% in the past week.
Even so, aluminium prices on the LME have increased by 19% in CY22 so far (till 17 March). There are primarily two factors which are causing the increase in aluminium prices. One, the Ukraine conflict has resulted in a surge in energy prices which has a bearing on the production of aluminium as it is an energy intensive metal. Second, the sanctions on Russia are a point of worry as it is the second largest exporter, said analysts at JM Financial Institutional Securities Ltd in a report on 15 March. Also, the supply chains were disrupted with Russia invading Ukraine.
On account of these factors and multi-year low LME inventory at 0.75 million tons, analysts at JM Financial believe that the current elevated levels are likely to prevail.
Meanwhile, the demand environment is robust with this metal being widely used across most sectors such as automotive, beverage cans and aerospace industries. But rising oil prices means increasing costs.
In this scenario, the Indian producers are comparatively better placed in terms of energy requirements as a significant portion of coal is being sourced through Coal India Ltd (CIL) linkages or captive mines.
Hindalco obtained 60% of its coal requirements from CIL linkages in the December quarter (Q3FY22). “The outlook for Hindalco remains buoyant given a) Novelis Inc. (Hindalco’s overseas subsidiary) – strong LME-scrap spreads continue b) India aluminium continues to benefit from high realizations c) enhanced coal security post addition of Meenakshi and Chakla coal mines and d) strong free cash flow generation and focus on de-leveraging (short-term working capital requirements to increase) to contain net debt/EBITDA," added the JM Financial report. Ebitda is earnings before interest, tax, depreciation and amortization.
Unsurprisingly, the shares of Hindalco have rallied by 21% so far in CY22. Overall, robust outlook on aluminium may well support the stock’s valuations at the current level, near-term upsides may be capped after the significant appreciation.
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