Aluminium prices have moved sharply lower over the past few trading sessions on expectations that the US would be diluting sanctions against Rusal. Aluminium prices on the LME were down 8% in yesterday’s trade on the recent announcement. We expect aluminium prices to correct in the light of this new development. Indian aluminium producers like Hindalco and Nalco are also likely to face near-term pressure as well. However, we remain positive on Hindalco due to prospects for the company’s business.
Hindalco Industries is likely to see a rise in revenue across its business segments backed by (1) improvement in Novelis shipments due to US auto sales and (2) improved aluminium and copper outlook due to higher manufacturing activity. The company would see PAT CAGR of 9.2% over FY18-20E with revenues remaining flat over the same period. The company is likely to see EBITDA margins of 12.2% in FY20E, an expansion of 45bps over FY18-20E. The stock is currently trading at 10.4x FY20E EPS.
Hindalco is one of the largest producers of aluminium and copper globally. Alumina production for the company stood at 2,170kt in 9MFY18, with Aluminium metal sales at 953kt (up 4% yoy). Copper sales stood at 299kt, up 15% yoy. Total shipments from Novelis stood at 2,383kt in 9MFY18, up 5% yoy. Hindalco is likely to benefit from the US imposing sanctions on Rusal (second largest aluminium producer) through better pricing and volumes.