Motilal Oswal Financial Services sees 15% upside in this metal stock; take a look

Hindalco Industries share price: Shares of Hindalco Industries, the flagship metal company of Aditya Birla Group, gained as much as 1.71 per cent to Rs 486.35 apiece on the BSE on Thursday, September 21. Over the past 12 months, the stock has gained over 16 per cent. In comparison, the Nifty50 has risen around 11 per cent during the window. The stock finally ended at Rs 479.15, up 0.21 per cent on the BSE.

Hindalco Industries, India's leading aluminium and copper manufacturing company, is likely to benefit from the capacity expansion and its shift to high-value-added downstream products, note analysts.

Motilal Oswal Financial Services, in its September 20 note, says, "We believe Hindalco is adding downstream capacities at the right time to capture the robust growth opportunities. Despite near-term headwinds due to a slowdown in China and its impact on non-ferrous prices, the long-term outlook remains positive."

Earlier this month, Nilesh Koul, an executive with Hindalco Industries Ltd., said the aluminium sector in India is a bright spot in an otherwise flat to downbeat global picture as the government rolls out infrastructure and industry seeks to satisfy growing demand.

India is already the world's second-biggest aluminium producer and third-biggest consumer, with demand set to double over the next decade, Koul added. 

"As China seeks to revive its economy and the West worries about tipping into recession, the Indian government is investing in infrastructure such as railways and airports, while housing construction and the auto industries are also booming," Reuters said in its September 14 report, quoting Koul.

Aluminium demand in India is expected to jump to 9 million metric tons by 2033 from about 4.5 million this year, the executive added.

All these bode well for Hindalco Industries.

Coal linkages to drive cost synergies

Motilal Oswal notes that Hindalco's total coal requirement is around 16 million tonnes (mt), which is currently fulfilled either by its own mines, linkages (nearly 41%), e-auctions (nearly 53 per cent) or imports.

Chakla mine, which has a peak rated capacity (PRC) of around 4.5 mt, is progressing as per timelines. The box cut is expected to come on stream by October'24, and the mine is expected to be fully operational in FY26E, the brokerage adds.

"Once operational, it will reduce the company’s dependency on the procurement of coal from external sources. Hindalco has also been declared a preferred bidder for the Meenakshi West mine at a nearly 33 per cent premium, which has a PRC of 6-7 million tonnes," the brokerage added. 

Hindalco enjoys healthy balance sheet

The company’s Indian operation had a net debt-to-EBITDA (NE) ratio of 0.22x as of 1QFY24 and is well on its way to being net debt-free. Novelis’s NE ratio stands at 2.69x and the consolidated NE ratio stands at 1.73x; in the long term, the company plans to keep it below 2x. Hindalco has a strong balance sheet and all the incremental capex will be funded via internal accruals, the brokerage says. "We reiterate our BUY rating on the stock with our SOTP-based TP of Rs 550," it added.