For Hindalco, aluminum’s recent rally appears largely macro-driven, mainly on expectations of a weaker US dollar, rather than tight underlying fundamentals, InCred said. At current price levels, most primary smelters remain viable globally, limiting supply-side discipline. Higher prices also encourage higher scrap collection; the spread between primary and scrap is two standard deviations above the long-term average, a level that typically provokes a strong recycling response. The global stock of used aluminum stands at 1.4 billion tons, and the scrapping rate could rise from historical 1.4 to 1.5% to as high as 1.7% during periods of strong price incentives, according to data from the International Aluminum Institute (IAI). As macroeconomic support wanes and scrap supply improves, aluminum prices are expected to decline by around 20% over the next year.
Capital investments can damage the balance sheet
Hindalco Industries is undertaking a significant capital expenditure program of Rs 700 billion over 26-28 years, which is likely to increase its balance sheet debt. As capital work in progress increases, the market may begin to place incremental value on these ongoing investments. Historically, the company has traded at around 7.5x EV/EBITDA during such capital investments.
Aluminum prices are going to drop
A moderation in aluminum prices is likely to weigh on NALCO’s earnings, although higher alumina volumes could partially mitigate the impact. However, if scrap continues to dominate the increasing metal supply, the sustainability of aluminum prices around $2,500/ton remains a key question. The assumption builds for alumina prices at US$325/ton for FY27F – around 13% of the expected aluminum price – implying an increase from 10% in FY26F to 13% in FY27F. This assumption seems relatively optimistic, but EBITDA is still expected to decline to Rs 61.7 billion in FY28F from Rs 72.6 billion in FY26F.
For NALCO, the alumina expansion comes into operation at a time when alumina prices are falling. With increasing metal supply increasingly coming from scrap rather than primary smelting, the long-term demand path for alumina remains uncertain. Historically, alumina prices have fluctuated around 16 to 17% of aluminum prices, but recently this ratio has fallen to almost 10%, indicating that there is some degree of decoupling between alumina and aluminum price trends.
EBITDA is expected to decline
The potential decline in aluminum prices is expected to weigh on earnings, with EBITDA expected to decline to Rs 366 billion in FY26F from Rs 260 billion in FY28F. This could push the net debt to EBITDA ratio above 2 by FY28F. While this level is not alarming, estimates assume that working capital will not increase if aluminum prices fall.
“NALCO is trading at a significant premium valuation of 4x P/BV; however, given the upcycle, the stock is still close to its historical average on an EV/EBITDA basis. We continue to believe that P/BV is the right metric to evaluate the company; however, to account for the upcoming expansion, we value it at 7.5x FY28F EV/EBITDA to arrive at a new target price of Rs 302,” the broker said in a note. dated February 16.
(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of The Economic Times)
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