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Expansion plans to strengthen company’s foothold in the industry

We initiate coverage on Hindalco Industries Ltd (“HIL” or “the company”) with a bullish BUY rating based on its: (1) steadfast focus on downstream businesses for Aluminium and Copper, (2) emphasis on cost optimization projects to ensure global competitiveness, (3) sustainably strong earnings outlook in the light of upcoming capex, and (4) a discernible bottoming out of global Aluminium prices.

Steadfast focus on Aluminium and Copper downstream businesses

Novelis is a key contributor to Hindalco’s earnings. Commanding more than 50% of EBITDA earnings share, Novelis profitability is largely insulated from the LME Aluminium pricing risk. HIL is focused on expanding its downstream businesses, which are high margin markets in India as well as for Novelis. HIL is determined to improve its VAP product mix to gain higher margins, especially in its Indian Aluminium business. Going forward, HIL intends to add ~200 ktpa downstream capacity in India, a likely gamechanger for its Aluminium business.

Emphasis on cost optimization projects to ensure global competitiveness

In addition to having a strong growth plan on the downstream side, HIL continues to focus on cost optimization projects in order to keep itself as one of the pioneers in the non-ferrous segment globally. Majority of the Aluminium Chinese smelters operate in the third and fourth quartile of the cost curve, whereas HIL continues to remain in the first quartile thereby, generating margins on both its upstream and downstream assets. Additionally, power costs account for ~40% of the Aluminium cost sheet. The company’s annual coal requirement is ~16.0 mtpa, out of which ~12 mtpa is sourced through Coal India Ltd through contracts and e-auctions. With the captive coal mines now coming up in the next couple of years, we see that the company’s reliance on sourcing the raw material from external sources would completely go away thereby creating more trigger points for margin expansions.

Sustainably strong earnings outlook in the light of upcoming capex

The company’s growth plans showcase HIL’s focus on shifting to being one of the lowcost producers for the non-ferrous metals going down the line. We expect the EBITDA/tonne for the Aluminium business to grow steadily with the introduction of new downstream capacities as well as the new cost-saving initiatives both on the upstream and the downstream side. For copper, the company operates on the TC/RC’s as well as cathode and CCR production. We expect the copper business to sustain ~INR 2,000 crores of EBITDA on an annual basis. The incremental EBITDA we project, should come from the rise in the copper prices, an industry that has continuously been in a supply side deficit which is expected to enhance in the upcoming years. On the Novelis front, post the company’s acquisition of Aleris, it has given a boost on the sustainable EBITDA performance front. We expect the company to maintain the $500/tonne levels for the upcoming quarters as the demand outlook for the Aluminium FRP products remains strong. Historically, the beverage can demand has remained strong even during periods of recessions and the company’s focus remains on maintaining the higher share for the cans in its product mix.

A discernible bottoming out of global Aluminium prices

Aluminium prices went through a slump during most part of CY 2023, largely an outcome of global economic slowdown especially in US and Europe coupled with a poorly performing Chinese economy as per street estimates. We reckon the global transition towards green energy sources and EV makers will provide enough momentum for aluminium demand, thereby helping prices firm up from the current levels.

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