Pros and Cons of Investing in Hindalco

Aluminium is the second most used metal in the world after steel and India is the fourth largest producer of this metal.

India has a share of around 5.3% of the global aluminium output. India also has nearly 10% of the world's bauxite reserves and the growing aluminium sector leverages this.

Additionally, India's low cost of production and conversion costs in alumina provide a competitive advantage in the global market.

However, the aluminium sector remains vulnerable to global price fluctuations, demand shifts, and supply-chain disruptions.

Domestically, the rise in infrastructure development and automotive production, as well as the electrical and electronics industries, are driving the growth of this sector. This sector plays a vital role in supporting industries like auto, construction, electrical, and electronics.

Hindalco Industries is one of India's largest aluminium producers.

Part of the Aditya Birla Group, its reach extends internationally through its subsidiary Novelis, a major player in aluminium rolling and recycling.

The stock has been a big wealth creator in the Indian stock market over the last 5 years.

Hindalco Share Price - 5 Years

In this editorial we will discuss the pros and cons of investing in the stock of Hindalco.

Pros

#1 Fundamentally Strong Business

Hindalco ranks among the top 5 global producers of aluminium and operates one of the world's largest single-location copper smelters.

The company also manufactures chemicals such as calcined alumina and aluminium hydrates used in the water treatment industry.

It has a wide product portfolio that caters to the needs of FMCG, aerospace, automotive, construction, and industrial and household appliances across the world.

Through its subsidiary, Novelis, which is also the world's largest recycler of aluminium, Hindalco manufactures automotive and beverage can sheets in North America, South America, and Europe.

Going ahead, the company is focused on downstream expansions in India, with an emphasis on increasing contributions from value-added products. This strategy aims to enhance profitability and protect the company from fluctuations in aluminium prices.

Further, it expects to sustain its positive momentum in the copper business, driven by increasing volumes, robust demand, and improved TC/RC (Treatment Charge/Refining Charge) margins.

#2 Good Financials

In the last five years, the company's revenue grew at a compound annual growth rate (CAGR) of 16.2%, driven by a stable demand for aluminium and healthy growth in copper demand.

However, in FY24, the revenue fell 3.2% on a year-on-year (YoY) basis.

In terms of EBITDA growth, the company reported a 10% CAGR over the last five years due to steady revenue growth and low-cost production.

Over the past 5 years, Hindalco's net profit has grown at a CAGR of 28.1% due to solid operating profit growth and stable interest costs. In FY24, the net profit grew 22.7% YoY.

The company's leverage has reduced considerably over the years. From a debt to equity of 1 in FY20 to 0.4 in FY24. During the same period, the cash flow form operations almost doubled from Rs 127 billion (bn) to Rs 240 bn.

The return on equity (ROE) and return on capital employed (ROCE) over the last 5 years has averaged 10.5% and 11.8%, respectively.

Cons

#1 Commodity Market Volatility

At the end of the day, Hindalco is a commodity business. It's primary product's price is decided by global financial markets. The company itself has limited pricing power.

This was seen in FY24 when commodity market volatility impacted final sales prices, which in turn negatively affected revenue.

While the company has mitigated this price volatility via various measures, it will still be impacted going forward.

The company has also implemented various cost saving and sustainability measures to protect it's net margin. These measures have succeeded to an extent.

However, a global economic slowdown will negatively impact aluminium prices which will put pressure on the company's bottomline.

#2 Dependence on Novelis

Hindalco's performance is often tied not only to its own operational results but also to the results of Novelis. Any challenges or successes at Novelis directly impact Hindalco's valuation.

For example, last November, Novelis reported disappointing quarterly results.

The revenue did rise 5% YoY but the operating results spooked the market. The operating profit, at US$ 462 m, was down by 5% YoY.

The net income for Novelis attributable to shareholders fell 18% YoY to US$ 128 million (m). This decline was due to higher costs and reduced operational efficiency.

The increase in sales was not enough to offset the profitability decline as operational costs, increased, particularly in scrap metal.

Given that Novelis contributes about 67% of Hindalco's EBITDA, these results had a notable impact on Hindalco's stock.

Such a situation could happen any time in the future. Even if the company has a good quarter in terms of sales growth, the profitability could be badly affected due to the performance of Novelis...and it's the profits that matter to shareholders.

Stock Outlook

Much will depend on the company's operating results.

The market is not too concerned about the revenue growth but if the operating profit remains under pressure due to high costs, the stock could remain rangebound.

In addition to this, if fears of a recession in the US were to pick up, all commodity stocks will take a hit.

Hindalco won't be spared in this situation.

However, the company's fundamentals are strong and the management has laid out growth plans.

Hindalco has invested heavily in capacity expansion in the past, which worked pretty well for the company. It continues to follow the same strategy and plans to invest Rs 400 bn over the next two years to expand its capacity across various manufacturing facilities.

It also plans to introduce several new products in the value-added category to increase its profitability.

Given the growing demand for aluminium across various industries such as automobile, infrastructure, railways, and construction, the capex investments of the companies couldn't come at a better time.

It's just a question of executing these growth plans in the face of rising challenges like trade wars, volatile commodity prices, and shaky economic growth.

For more details about the company, you can have a look at Hindalco's Fact sheet and its quarterly result.

You can also compare Hindalco with its peers.

Hindalco vs Starlit Power

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