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Beyond the recent volatility – secular uptrend intact

Aluminium prices have rallied ~7% from recent lows on hopes of improved demand from China amidst easing Covid norms. Increased smelter curtailments across Europe on account of the energy crisis and multi-year low LME inventory at ~481 KT will likely support Aluminium prices going forward. Aluminium market (ex-China) is expected to remain in deficit (Norsk forecast) during 2023 fuelled by smelter curtailments despite expectations of recession led demand headwinds while China is expected to move to surplus given a higher rate of production inside China. Novelis continues to be relatively well placed despite fears of recession as ~60% of Novelis’ business comes from can body, which is likely to have a resilient demand outlook. The auto business which accounts for ~18% of the business has a good order-book although building and construction segment may witness some slowdown. The company expects near term margins to be impacted due to high cost inventory and inflationary pressures (US$75-125 per ton). However, medium term Adj. EBITDA/t guidance is maintained at USD525/t. Novelis expects ~USD500mn of free cashflow in FY23 (1H free cashflow was negative USD90mn) aided by working capital release in 2H. India operations are likely to benefit from declining thermal coal prices (~25-30%) and improving linkage coal availability.

The long term outlook for Hindalco continues to remain buoyant given a) Novelis – maintaining medium term EBITDA/t guidance of ~US$525 b) improving trajectory for India aluminium business given thermal coal price correction c) enhanced coal security post acquisition of Meenakshi and Chakla coal mines at recent auctions and d) growth capex to augment downstream capacity amidst encouraging demand for FRP products. Hindalco, given ~75%+ steady/strong EBITDA being non-LME linked, remains our preferred play in the metal space. Re-iterate Buy.

* Easing Covid norms in China to aid Aluminium prices: Aluminium prices have rallied ~7% from recent lows on hopes of improved demand from China amidst easing Covid norms. Increased smelter curtailments across Europe on account of the energy crisis and multiyear low LME inventory at ~481 KT will likely support Aluminium prices going forward. Aluminium market (ex-China) is expected to remain in deficit (Norsk forecast) during 2023 while China is expected to move to surplus.

* Novelis relatively well placed despite near term pain: Novelis continues to be well placed despite fears of recession as ~60% of Novelis’ business comes from can body, which is likely to have a resilient demand outlook. The auto business which accounts for ~18% of the business has a good order-book although building and construction segment may witness some slowdown. The company expects near term margins to be impacted due to high cost inventory and inflationary pressures (US$75-125 per ton). However, medium term Adj. EBITDA/t guidance is maintained at USD525/t.

* Indian operations to benefit from easing cost pressure: Hindalco’s India operations are likely to benefit from declining thermal coal prices. Further, availability of linkage coal is expected to improve given lower demand by power producers and improvement in domestic supply. The Company expects to operationalize Chakla coal mines by Dec’23 which will likely reduce energy bill for the company.

* Hindalco well placed despite near term pressure: Long term outlook for Hindalco continues to remain buoyant given a) Novelis – maintaining medium term EBITDA/t guidance of ~US$525 b) improving trajectory for India aluminium business given thermal coal price correction c) enhanced coal security post acquisition of Meenakshi and Chakla coal mines at recent auctions and d) growth capex to augment downstream capacity amidst encouraging demand for FRP products. Hindalco, given ~75%+ steady/strong EBITDA being non-LME linked, remains our preferred play in the metal space. Re-iterate Buy.

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