Hindalco’s expansion plans are fine but demand is still muted

Subdued demand has weighed on aluminium prices in 2023 so far and this has been a pain point for the Hindalco Industries Ltd stock. The shares have been flat till now versus a nearly 8% gain in the Nifty 50 index. Amid this, Hindalco’s focus on expanding its downstream capacities bodes well as it brightens long term prospects.

Downstream capacities manufacture value-added products such as flat rolled products (FRP) and extrusions. Recently, analysts visited the company’s Hirakud and Aditya plants in Odisha and have returned pleased. The Hirakud plant has a hot rolled capacity of 700 kilo tonnes per annum (ktpa). But the capacity utilization is around 30%, leaving room to cater to downstream expansion such as the upcoming cold rolling capacity at Aditya. Hindalco is on track to add 170 ktpa of cold rolled capacity at Aditya. Hot rolled and cold rolled capacities cater to different steps in the downstream production process. Moreover, the expertise from wholly owned overseas subsidiary, Novelis Inc., in the downstream business would be an added advantage. Notably, downstream products are somewhat immune to the volatility seen in aluminium prices on the London Metal Exchange (LME) and thus, it would aid Hindalco’s margin performance.

Also, “The downstream products are relatively less cyclical in nature and are less dependent on volatile demand conditions in China. Given this, the downstream business commands higher earnings multiple when compared to upstream," said Satyadeep Jain, an analyst at Ambit Capital. Moreover, the Hirakud and Aditya facilities are near the Mahanadi coal fields, which means they benefit from lower coal logistics costs.

Overall, the commencement of mining at Meenakshi and Chakla coal mines would boost captive consumption, thus aiding Hindalco’s margin. For perspective, in FY23, Hindalco’s standalone operations clocked Ebitda margin of 9.7%. It helps that demand is slated to rise for products made at the Hirakud FRP plant. ICICI Securities notes the plant is capable of producing ultrasonic defect-free aerospace grade material and alloy for naval applications. The hard alloy produced at the plant can substitute imports and was utilised in Chandrayaan – 3, added the brokerage. To be sure, near-term catalysts for the Hindalco stock appear few and far between. Aluminium prices are still far from getting back their sparkle. In the September quarter, LME aluminium price averaged 4.4% lower sequentially. Though, lower cost of production may offer some cushion to margin in the upcoming Q2 results.