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Hindalco Industries Limited (“Hindalco” or “the company”) is the metals flagship company of the Aditya Birla Group, headquartered in India. The company is primarily involved in the business of Aluminium and Copper and operates across ten countries globally. Hindalco is one of Asia’s largest producers of primary Aluminium (excl. China) as also the world’s largest Aluminium rolling and recycling company. In 2007, the company acquired Novelis – the world’s largest Aluminium rolling company, making Hindalco’s global footprint, and ranking it among the top 5 global Aluminium majors.

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.

In addition to having a strong growth plan on the downstream side, HIL continues to focus on cost optimization projects 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.

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.

With (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 discernable bottoming of global Aluminium prices makes us bullish on Hindalco and we recommend a Buy on the stock.

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SEBI Registration number is INZ000185632