CLSA reiterates its buy ratings for Hindalco Industries Ltd and Vedanta Ltd as the brokerage anticipates robust aluminum demand recovery, supporting prices, and, particularly, the advantageous position of Indian smelters.
CLSA raised its target price for Hindalco to Rs 770 from Rs 635 a share while keeping the target price for Vedanta at Rs 430 a share.
Factors in favour
The brokerage firm highlights Indian smelters' advantageous position due to high backward integration and domestic sourcing of key raw materials like bauxite and coal. It has raised Hindalco's FY24-26CL EBITDA by 4-13% due to higher aluminum price assumptions and slight increase profitability estimates for Novaltis.
Additionally, CLSA believes Vedanta is well positioned to benefit from the commodity upcycle due to its diversified exposure and ongoing capacity and profitability enhancement efforts through its capex program.
China's aluminum demand surged in Q1 2024, driven by the automotive and photovoltaic sectors. Global demand remains robust except for building and construction. Analysts anticipate sustained high aluminum prices due to cost pressures, especially from alumina. Downstream industries foresee a recovery in demand for beverage can sheets, autos, and aerospace.
China's 2024 aluminum consumption surged by 12% YoY, driven by robust activity in automobiles, NEVs, and photovoltaic capacity despite a decline in gross floor area completion, low inventory levels, and import rises characterised the market. Production in Yunnan resumed in March, albeit at a slow pace. CLSA said looking ahead, factors like capacity constraints, investment costs, and supply uncertainties are expected to keep prices elevated, supported by demand growth and production increases. CLSA anticipates an average aluminum price above Rmb19,000/ton in 2024.
The brokerage also said global demand remains resilient with strong performance in automotive and electrical sectors, while packaging shows signs of recovery. Building and construction, weakest in Europe, stabilises in North America. Renewable energy transition drives future demand. Alumina prices surge due to Chinese refinery capacity cuts and decarbonisation pressures. High copper/aluminum ratio encourages metal substitution.
Russian aluminum sanctions are unlikely to significantly impact LME prices. Downstream companies report destocking in aluminum can-stock is mostly over, with restocking driving demand, especially in Europe. Automotive and aerospace demand remains robust but below pre-COVID levels. Warmer weather boosts demand in some regions, but promotional activity remains weak, particularly in Asia, it added.
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