Hindalco's earnings outlook improves with rising aluminium prices

By Ujjval Jauhari
Investor interest in integrated manufacturers such as Hindalco is high. Photo: iStock (iStock)

The stable rise in aluminium prices and disruption in global supply of bauxite have kept investor interest in integrated manufacturers such as Hindalco Ltd high. 

The recent rally in aluminium prices has lifted earnings outlook for Hindalco, said analysts at Jefferies India Pvt Ltd in their note. Any supply disruptions in bauxite due to political issues in Guinea will further benefit Hindalco as it has captive bauxite mines, they added.

Aluminium prices on the London Metal Exchange (LME), which have continued to gain, had hit a 13-year high of about $2950 a tonne recently. 

The risk to global supplies of bauxite, the key raw material for aluminium manufacturing, has risen from the events in the west African nation of Guinea. The country caters to 20-25% of global supplies and political instability can impact bauxite availability significantly. Against the backdrop, integrated manufacturers having captive bauxite and alumina supplies are well placed. Looking at the surge in alumina prices and demand, the company can even sell some alumina in the open market that will add to its benefits.

Meanwhile, as Indian operations of Hindalco benefit, the prospects for its US subsidiary Novelis also remain strong. The rise in demand for cans, packaging material, and auto sheets keeps the outlook firm. The demand from the auto sector is surging as companies replace steel with aluminium. 

Novelis is also benefitting from rising capacities and the acquisition of Aleris. Novelis, which now contributes almost two-third to Hindalco’s consolidated operating profits, is seeing a rise in profitability too. 

Novelis Q1FY22 adjusted Ebitda margin (Ebitda per tonne) had risen to $522 per tonne (up 60% year-on-year). The company has raised its Ebitda margin guidance to more than $500 per tonne in FY22, higher than $480-500 per tonne guided earlier.

With firm support from Novelis, and improved prospects of Indian operations, not surprising Hindalco stock prices have almost doubled year-to-date. The prospects remain firm and analysts as those at Jefferies have raised FY22-23 earnings per share estimate by 7-13% on higher aluminium prices.

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