US Tariffs May Enhance Hindalco’s Margins and Scrap Spreads: Bank of America

Global brokerage firm and lender Bank of America has reiterated its bullish stance on metal company Hindalco, setting a target price of ₹725 per share on Friday, 21st February.

As of 12:00 AM IST, Hindalco Industries share price was at ₹652.35, up 2.12% from its previous close.

According to the brokerage, Hindalco's downstream counterparts, Constellium (CSTM) and Kaiser (KALU), recently released their earnings reports for the quarter ending December 31, 2024. While the near-term outlook for aluminum FRP shipments remains uncertain due to mixed end-market demand, the long-term prospects continue to be optimistic.

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Potential Benefits from U.S. Tariffs

Bank of America highlights potential advantages for Hindalco if the U.S. imposes tariffs on aluminum imports. Such measures could expand scrap spreads and enhance overall profit margins for the company. If tariffs lead to restrictions on imports, domestic aluminum producers in the U.S. might need to source more material locally, which could increase the demand for premium aluminum products. This scenario would be favorable for Hindalco’s subsidiary, Novelis, which has a significant presence in North America.

However, the brokerage also warns that if Hindalco does not gain directly from these tariff measures, North America’s scrap supply is expected to remain tight. This could push aluminum prices higher, impacting cost structures for producers, including Novelis. Since scrap is a key input for aluminum rolling companies, sustained high prices may pressure margins in the medium term.

Demand Outlook and Business Segments

Regarding demand, Bank of America maintains a mixed short-term outlook. While some industries may face challenges due to slowing economic conditions, packaging demand remains robust, providing stability to Hindalco’s operations. The growing preference for sustainable packaging, driven by environmental concerns and regulatory changes, is expected to support aluminum demand in the beverage and food packaging sectors.

The automotive sector, another key consumer of aluminum, is seeing varied trends. While electric vehicle (EV) production continues to rise, traditional automakers are facing supply chain challenges, affecting overall demand for aluminum sheets used in vehicle manufacturing. The aerospace industry, however, is witnessing a steady recovery, with increasing aircraft orders leading to higher demand for aluminum products.

Hindalco’s Q3FY25 Performance

Domestic brokerage Elara Securities noted that while weak margins at Novelis weighed on performance, Hindalco’s India operations delivered a record-high quarterly aluminum EBITDA in Q3FY25, which was a key positive. The strong earnings from domestic operations were driven by higher sales volumes and cost efficiencies, offsetting some of the weaknesses in the global market.

Looking ahead, Hindalco anticipates a recovery in Novelis’ performance in Q4FY25, primarily driven by increased volumes and higher prices from new contracts. The company is also focusing on operational efficiencies and strategic investments to strengthen its market position.

Medium-Term Outlook and Stock Performance

"In the medium term, we expect aluminum to outperform ferrous metals due to a more favorable demand-supply scenario, which should work in Hindalco’s favor," Elara Securities added. The brokerage expects continued strength in Hindalco’s India business and a gradual improvement in Novelis’ margins as market conditions stabilize.

Hindalco has also been investing in expanding its value-added product portfolio, particularly in the aerospace, automotive, and packaging segments. This diversification strategy is aimed at reducing dependence on commodity price fluctuations and enhancing long-term profitability.

Hindalco's Outlook Going Forward

Over the past year, Hindalco's stock has risen by approximately 25%, significantly outperforming the Nifty 50 index, which has gained around 3.9% during the same period. The company’s strong performance, strategic expansions, and positive long-term outlook have contributed to increased investor confidence.

Going forward, analysts believe that Hindalco’s ability to navigate global market uncertainties, leverage growth in high-margin segments, and manage cost dynamics will be crucial in sustaining its upward trajectory. Investors will closely watch key developments, including tariff policies, demand trends in major industries, and the company’s execution of its expansion plans.