Commodity prices are increasing rapidly around the world. Recently, the prices of aluminum have seen a significant increase. This has improved the Earnings outlook of Hindalco Industries. Political upheaval in the West African country of Guinea could also disrupt the supply of bauxite and increase its costs. This can benefit Hindalco (HDNL) as it has its own mines of bauxite. Although there are some risks ahead for the auto sector, Hindalco’s US subsidiary Novelis may benefit from the structural change moving away from aluminum to auto and packaging.
Brokerage firm Jefferies has projected an increase of 7 to 13 per cent in the EPS of Hindalco Industries in the financial year 2022-23 due to the rise of aluminum. It has given ‘BUY’ rating to its shares.
Heavy rise in the price of aluminum in the international market
Aluminum prices on the London Metal Exchange have risen 13 per cent in the last one month. Aluminum prices have risen 49 per cent to Rs 2,950 per tonne since the beginning of this year. This is the highest level in 13 years. In addition, the political upheaval in the West African country of Guinea has raised concerns about the availability of bauxite.
Alumina prices have risen to $426 a tonne at the end of August. The spot price is now running at $ 508 per tonne. If there is a problem in the supply of bauxite, then the prices may increase further. Therefore, any hike in aluminum prices will be a win-win for Hindalco (HNDL) as it has its own bauxite mines. Production has started at the company’s Utkal alumina refinery. The capacity of the plant is 5 lakh tonnes. Alumina production can start here. If the price of alumina increases in the international market, then the company would like to sell it in the external market. Due to this the company is sure to make profit.
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Expected growth in Novelis business
Apart from this, the demand for the product of the company’s American subsidiary Novelis is expected to increase. Although there is a slight risk due to reduced production of vehicles due to chip shortage, but the production of SUVs, pick-up trucks and electric vehicles has increased the demand for aluminum. The company is also benefiting from increasing use of aluminum for packaging instead of plastic and glass.
According to Jefferies, aluminum prices may increase by 9 to 11 percent in the financial year 2022-23. With this, Hindalco’s Ebitda can increase by 5 to 8 percent, while the EPS will increase by 7 to 13 percent. The production from Utkal Alumina can be sold in the foreign market. This can increase the company’s Ebitda by 3 and EPS by 5 percent. The company’s net debt per share seems to be declining at 14/30 per share.
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