Stock Fundamentals

Base metal stocks: Demand recovers, but uncertainty stays

Satya Sontanam | Updated on November 15, 2020

Copper pipes are for sale at a store in Shanghai, China, on Friday, Aug. 21, 2009. Copper rallied in London and Shanghai after gains in equities added to evidence that the global economy is recovering, improving the demand outlook for industrial metals. Photographer: Kevin Lee/Bloomberg   -  Bloomberg

Hindalco and Hindustan Zinc are among the better bets in this space

With rise in LME( London Metal Exchange) prices and recovering demand from the user industries, base metal companies such as Hindustan Zinc, Vedanta, Hindalco and NALCO recorded impressive growth in the quarter ended September 2020 compared to the previous June quarter.

In line with improving fundamentals and broader market recovery, prices of metal stocks too recovered by about 30 to 130 per cent since the correction in March 2020. While Hindustan Zinc’s share price has gone past its pre-covid levels, Vedanta’s lingers at low levels due to the adverse market sentiment post-delisting proposal. Here’s a closer look at how base metal players fared and what’s lies ahead.



Hindustan Zinc (HZ) accounts for 80 per cent of India’s zinc output. With 50 per cent of zinc produced used for galvanising steel, improving demand for steel and from other user industries in the last few months aided HZ in the quarter ended September 2020. The company’s revenue rose by about 25 per cent (y-o-y) to ₹ 5,660 crore during the said quarter on the back of higher sales .

Not just zinc, sale volumes of other two metals -- lead and silver -- that the company produces have also risen in the September quarter, supported by higher production on the back of improved grade (percentage of metal that can be derived from mined ore).

The benefit of higher volumes was offset by lower LME prices of these metals in the said quarter compared to the year-ago period.

The average zinc & lead LME prices during the quarter were down by about 1 per cent and 8 per cent y-o-y to $2,335 per tonne and $1,873 per tonne, respectively, but sequentially up 19 per cent and 12 per cent, respectively.

Driven by higher LME prices sequentially and better volumes, revenue for Q2FY21 was up 42 per cent q-o-q.

Further, aided by structural cost reforms and lower coal input prices, the cost of production of the zinc was also lower by 7 per cent y-o-y (and -11 per cent q-o-q) to ₹ 68,228 per tonne. As a result of this and higher share of high-margin silver sales this quarter, the company recorded higher operating profit for the quarter at ₹ 2,952 crore, up 39 per cent y-o-y and 85 per cent sequentially, with margins at healthy 52 per cent.


The operational performance of three major aluminium players in India — NALCO, Hindalco, Vedanta — improved from the previous quarter that was severely impacted by Covid-19, but still lags compared to the corresponding period in the previous year.

The white metal, known for its volatile price nature, which fell to about $1,400 per tonne in April 2020, started moving up in line with other base metals, settling at an average trading price of $1,704 per tonne during the second quarter of FY21. The average price, was however, lower by 3 per cent y-o-y.

The revenues of NALCO, Hindalco and Vedanta from the Indian aluminium segment in the given quarter stood at ₹ 2,374 crore (0.4 per cemt up y-o-y), ₹ 4,796 crore (down -13 per cent y-o-y) and ₹6,395 crore (3 per cent down y-o-y).

One theme that played out across all the companies in the second quarter is the lower cost of production, supported by improved operational efficiencies.

Of the three, Vedanta recorded the highest operating profit margin of 26 per cent in the second quarter of FY21. NALCO’s and Hindalco’s aluminium segments (including raw material alumina) posted operating profit margins of 8 per cent and 22 per cent, respectively, during the same period.


The refined copper market in the domestic market in Q2 FY21 reached 77 per cent (147 KT) of the Q2 FY20 level of 190 KT. On a quarter-on-quarter basis, the market jumped by 62 per cent in Q2 FY21 compared to 91 KT in Q1 FY21. This could be on the back of recovery in the major copper consuming sectors such as telecommunications and automobiles.

The operational performance of three copper players — Hindalco, Vedanta and Hindustan Copper — has been mixed; while Vedanta’s copper unit remains shut.

The revenue of Hindalco and Hindustan Copper from the copper segment in the given quarter stood at ₹ 4,774 crore (7.3 per cent up y-o-y and 57 per cent up q-o-q) and ₹ 294 crore (up 2 per cent y-o-y and down 32 per cent q-o-q), respectively.

The year-on-year improvement despite lower/flat volumes could be on the back of rally witnessed in the copper LME prices, which rose by 12 per cent to $6,519 per tonne compared to the previous year. The average price of this orange metal in the first quarter was at around $5,356 per tonne.

Hindustan Copper, which is a vertically integrated copper player, may revive once refined metal prices rise, as the company does not depend on external sources for its raw material. The margins for the company in the said quarter is better at 27 per cent (despite falling from abput 30 per cent y-o-y) than Hindalco’s 4.4 per cent. However, other operational inefficiencies related to the company may hinder growth of the company.

The road ahead

Pent-up demand and gradual recovery in the economy contributed to the demand for base metals in the last quarter. Going ahead, the Government's focus on higher infrastructure spending may give a leg-up to the demand for base metals. Also, the structural cost control measures undertaken by companies earlier that yielded result in the September quarter are likely to be sustainable going ahead.

However, we need to wait and see the movement in metal prices. Spike in demand, especially from China, the world's largest producer and consumer of most base metals, on the back of higher infrastructure spending in the country and weak dollar have been a significant factors in metal prices moving upwards in last few months. Going ahead, prices will also depend on global demand for base metals, which still looks subdued, developments on vaccine for Coronovirus and how the US-China trade relations evolve unde the new Government in the US. Resurgence of the pandemic in big way will likely dampen the demand and prices of base metals.

Companies with strong fundamentals and better liquidity and debt metrics could ride this crisis better than others.

Hindalco can be one stock for those looking at investing in base metals space. The optimistic outlook for its US arm Novelis including recently acquired Aleris (despite at higher valuations) is a positive for the company. Improving performance of Indian aluminium business by focussing on cost measures will aid profitability of the company in the long-run. Currently, the stock is trading at about 33 times its trailing twelve month earnings. However, the steep valuation is due to the poor performance in Q1 FY21, in which the company reported losses.

Hindustan Zinc is another company in the metals space that appears fundamentally decent. High operating profit margins, expansion projects that will be commissioned in next three to four years and huge reserves of ore for mining (that can cater to production for next about 25 years) provides good earnings visibility.

However, the stock is currently trading at slightly higher valuation of about 15 times trailing 12-mo earnings compared to its past average. Investors can consider this stock on corrections linked to broader market.

Published on November 15, 2020

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