On 13 February, when base metals major Hindalco announced its results for the December quarter (Q3FY24), its stock plummeted by 12% due to heavy selling. Despite this, analysts remained optimistic about the company’s future. On Bloomberg, out of 19 analyst reviews, 15 recommended buying or adding the stock, one was neutral, and three suggested reducing or selling, all positive recommendations with valuations significantly above the current stock price.
What explains this dichotomy between market movement and analyst opinion? The results were actually good with encouraging projections about demand in its key aluminium and copper segments. In addition, the company’s overseas subsidiary Novelis, maker of downstream aluminium products, indicated business was recovering in its crucial beverage cans segment.
But the market was responding to unfavourable news regarding cost overruns and delays at a new Novelis facility in the US, for which capital expenditure has been revised upwards by 65% to $4.1 billion and completion has been pushed back by a year. One may assume that analysts tracking the business would have made adjustments to their valuations for this news, which, of course, justifies a downgrade.
For other aspects, Hindalco’s management commentary was upbeat, and the company reported strong results. Hindalco can claim to be one of the most cost-effective aluminium producers globally and has shown excellent performance in its copper division. The company is expected to enhance its cost-effectiveness further by integrating coal supplies and adopting greener practices. With global demand for aluminium and copper on the rise, and an even sharper increase expected in India due to its focus on electric vehicles, housing, and infrastructure, Hindalco’s prospects look promising.
For Q3FY24, Hindalco’s consolidated revenue was flat year-on-year (YoY) at around ₹52,800 crore. While revenue from its aluminium segment and Novelis saw declines of 3% and 6% respectively, copper revenue increased due to higher shipments and better average selling prices.
Consolidated Ebitda (earnings before interest, taxes, depreciation, and amortization) soared 65% year-on-year to ₹5,900 crore, driven by lower input costs. Blended aluminium Ebitda increased 43% on year to ₹2,500 crore, with margins exceeding 28%. The copper business achieved a record high Ebitda of ₹656 crore, up 20% year-on-year.
Combined Ebitda/tonne for Hindalco’s aluminium division was at $889, compared to $611 in the year ago period. Novelis has maintained Ebitda/tonne guidance at $525/tonne for Q4FY24.
With a strong focus on captive power capacity and maintaining a coal inventory of 60-90 days, Hindalco is well-placed to manage its input costs effectively. The captive Chakla mine is likely to produce roughly 1 million tonnes of coal in FY25 and availability via linkages has also improved to 60%, up from 53%.
Hindalco also has a total of 152 megawatt (MW) of solar and wind energy, and another 50 MW of renewable energy capacity is expected by Q1FY25. Hence total input cost for aluminium was down by 3.3% sequentially and is expected to be stable in Q4FY24. The company hedges around 20% of aluminium production in international commodity markets.
Copper revenue rose by 16% year-on-year to ₹12,000 crore, reflecting strong market demand and increased shipments. The Ebitda/tonne for the copper vertical was at $653 in Q3FY24.
With aluminium demand expected to recover through FY25 and beyond, driven by the auto sector and a turnaround in beverage can inventories, and copper demand already on the upswing, Hindalco’s solid financial position suggests that the market may have overreacted to admittedly bad news.
