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Axis Securities
Hindalco (Buy)
Target: ₹564
CMP: ₹452.7
We initiate coverage on Hindalco Industries with a Buy recommendation and value the stock at ₹564 (SOTP-based). The company exhibits rerating potential as we expect LME aluminium prices to remain strong. We believe Hindalco to be a defensive play backed by stable cash flows and lower operational and financial leverage.
While aluminium prices witnessed notable price increase YTD, primarily due to major disruptions led by production curbs in China, we believe its outlook remains strong with LME prices staying above $2,500/tonne. China continues with its ambitious decarbonisation plan and has imposed stringent limits on carbon-intensive industries. This supports our assumption that the country will stick to its smelting capacity cap of 45mtpa. Signs of market deficit are clearly visible now with CY20 expected to be in deficit (CYTD deficit of 0.9mt).
We believe the supply tightness will persist in CY22, while demand remains strong across key end user segments.
Moreover, the rise in raw material prices may further support the aluminium prices. If the decarbonisation drive sustains, aluminium supply-demand dynamics would likely witness a structural change vis-à-vis earlier decades.
Against this backdrop, we forecast LME Aluminium prices to average at $2,596/tonne in CY22 and $2,585/tonne in CY23.
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