Hindalco’s decision to acquire Hydro’s aluminium extrusions business in India (Kuppam in AP) for
2.5bn (Link) falls within the envelope of Hindalco’s ‘Doubling the downstream’ strategy wherein the company has entailed a capex of US$1.1bn. The plant will also serve as an archetype for Hindalco's upcoming extrusions plant in Silvassa (7.3bn capex for 34ktpa greenfield plant).
Once commissioned, the Kuppam and Silvassa units are expected to boost Hindalco’s total aluminium extrusions capacity from 60ktpa to 109ktpa. The transaction is expected to close by Q1CY22. Sales in extrusion market is driven by dealer network, differentiated by quick turnaround and increasing SKUs, and customers prefer distributed setup closer to demand footprint. This, in our view, will be a deviation from the current means of doing business in Hindalco. We maintain ‘buy’ on Hindalco; stated downstream shift excites us.
Capacity map of global aluminium extrusions: Global supply of extrusions is ~30mtpa with ~19mtpa being provided by China. China has been the largest exporter to the world (~0.9mtpa); global trade flows are estimated at ~4mtpa (Bloomberg). Indian demand (our estimates) is ~ 400ktpa with 7-8% import supplied and industry utilisation at 80%. India is < 2% of global demand, concentrated in Building and construction (~60%+) and Industrial demand (25%+). Globally, extrusions is an extremely fragmented market (~25% capacity with ~45 companies >100kte in size and ~50% global capacity with long tail of players <20kte in size).
Indian market can potentially grow to 0.8-1mtpa market by CY30: The incremental demand is driven by B&C through expected increase in fabrication of formwork in India along with ductwork. Increased solar panel manufacturing within the country is also being looked upon as a catalyst for Aluminium extrusion demand.
Jindal Aluminium has grown to be the largest Aluminium extrusion player in India: Jindal enjoys largest dealer network in India (100+ dealers across 30 cities). There is a reasonable amount of dealer comfort due to timely product availability, with a typical product shipment time of ~ 1 week. Jindal, currently enjoys a decent brand premium, has gradually evolved to cash and carry during the pandemic by increasing the cash discount to distributors. Distributed setup is preferred by customers, closer to the demand footprint. For Hindalco, such a distributed play will be different from the rule book it is accustomed to.
Hindalco can choose to invest in foundry and drive metal cost savings through increased usage of scrap: With ~60% of Indian demand being generated by building and construction sector where demand is expected to witness an uptick in the medium term, investment in foundry may not be a bad idea in our view.
Valuation methodology and key risks: We maintain ‘buy’ with a target price of `550/share at 1.37x FY23E book value. Novelis is improving consolidated RoE. Earnings though are benefitting from cyclicality, from the elevated scrap to LME spread in particular.