Hindalco bets on value-added products for earnings growth, stock re-rating

ET Intelligence Group: Hindalco delivered record quarterly revenue and net profit for the September quarter amid higher metal prices and improving Novelis performance. However, the growth trajectory is expected to be muted in the second half of the current fiscal year owing to softer aluminium prices and higher input costs. The company has stepped up investments in capacity expansion and value-added products.

It has around ₹50,000 crore worth of expansion projects under execution in India and another ₹50,000 crore of investment opportunities under evaluation over the next five years. These investments are aimed at expanding aluminium, alumina and copper capacities, strengthening downstream operations and expanding captive mining operations.

The stock trades at a price-earnings (P/E) multiple of 11.2 compared with the three and five-year averages of 12.7 and 12.1 respectively. A discount to the historical valuations leaves room for a re-rating if earnings growth sustains.

India’s aluminium demand is expected to grow at around 7% annually over the next five years, according to the management. While the electrical sector has traditionally been the key demand driver, automobiles, packaging, consumer electronics, home appliances and data centres are emerging as important growth segments. This has prompted Hindalco to expand capacity.

Read more: Smallcap mutual fund inflows drop 29% MoM to Rs 6,407 crore in October. Should investors be cautious or continue investing?

The company is seeking to increase the share of higher-margin value-added products and reduce dependence on London Metal Exchange (LME)-linked earnings. Value-added aluminium products include flat-rolled products, foils and extrusions supplied to companies in the automobile, packaging and consumer goods sectors.

Novelis is moving from a phase of operational disruption and heavy capital expenditure to one focused on earnings growth and deleveraging. The company expects commercial shipments from its Bay Minette facility to begin in the June quarter of FY28.Read more: Debt mutual funds see sharp recovery in October as quarter-end outflows reverse

It expects annualised cost savings of $300 million by the end of FY27 and $350-400 million by the end of FY28, according to Motilal Oswal Financial Services. The brokerage, which has a target price of ₹1,180 on Hindalco Industries, has increased its FY27 revenue, Ebitda and profit estimates by 5%. The stock ended Wednesday’s session 1% higher at ₹960 on the BSE. The company is likely to face input cost pressures due to elevated coal prices in the December quarter, which could weigh on margins. However, the commissioning of captive coal mines and backward integration is expected to improve Hindalco’s cost competitiveness over the medium term.