Aluminium price upsurge improves Hindalco's earnings outlook: Jefferies India

The continuous upsurge in aluminium prices and disorder in global bauxite supply has attracted investors keen towards integrated aluminium producers such as Hindalco.

The diversified financial services company engaged in investment banking and capital markets, asset management and direct investing, Jefferies Indian analyst stated in their note that the fresh upturn in aluminium prices has geared up earnings outlook for Hindalco.

They further added: “Any supply disruptions in bauxite due to political issues in Guinea will further benefit Hindalco as it has captive bauxite mines.”

The prices of aluminium at the London Metal Exchange (LME) have kept gaining, while it reached a 13-year high of about $2950 a tonne recently.

The political unrest in Guinea has delivered risk and anxiety to the global bauxite supply chain. The West African nation caters to 20-25% of global supplies and the turmoil can impact bauxite availability significantly. 

The situation favours the integrated aluminium producers who own captive bauxite mines and alumina refineries for uninterrupted supplies. The integrated company can now sell some amount of alumina in the open market to add some extra benefits, focusing on the escalation of raw material prices.

Concurrently, as Hindalco’s Indian operations stand with benefit, the prospects for its US subsidiary Novelis also remain strong. The tower in demand for aluminium cans, packaging material, and auto sheets keeps Hindalco’s outlook encouraging. The demand from the auto sector is intensifying as companies following the path to replace steel with aluminium. 

Hindalco’s US unit of flat-rolled aluminium products and recycling, Novelis is also benefitting from rising capacities and the acquisition of Aleris. Novelis, the American industrial aluminium company that is now contributing almost two-third to Hindalco’s consolidated operating profits is seeing a growth in profitability too. 

Novelis Q1FY22 adjusted EBITDA margin had raised to $522 per tonne, and up 60% Y-o-Y. The company has raised its EBITDA margin guidance to more than $500 per tonne in FY22, higher than $480-500 per tonne guided earlier.

Novelis robust performance and the enhanced prospects by Indian operation has driven Kumar Mangalam Birla chaired Hindalco’s Industries stock prices to attain almost double year-to-date. The prospects remain firm and analysts at Jefferies have raised FY22-23 earnings per share estimate by 7-13% on higher aluminium prices.