Analyst Corner| Retain ‘buy’ on Hindalco with fair value of Rs 285

By: |
September 25, 2020 8:35 AM

Scrap spreads play a significant role in Novelis’ margins as scrap forms 60% of its raw material.

Hindalco, Novelis, Hindalco fair value, aluminum price, market newsThe recovery is led by reopening of scrap deposit centers and higher aluminum prices.

Scrap spreads rebound, Novelis margins to follow. Scrap spreads hit a three-year low in 1QFY21 as lockdowns impacted availability, handling and scrap-processing plants in North America. Scrap spreads play a significant role in Novelis’ margins as scrap forms 60% of its raw material. With opening up of economies, scrap spreads have rebounded to Jan 2020 levels and pent-up supply implies further upside. Recovery in auto volumes and scrap spreads should elevate Novelis’ margins back to pre-Covid levels in 2HFY21.

Aluminum scrap generation and processing was severely hit in 1QFY21 amid bottlenecks in the recycling supply chain with reduced inflow of used beverage cans/other scraps, health concerns related to scrap handling and suboptimal functioning of scrap yards. Lockdowns led to restocking of beverage cans and added to already robust demand. This in combination with 18% correction in aluminum price led to a 35% CYTD correction of scrap spreads to a three-year low of $0.25/lb in May 2020.

Scrap spreads have now recovered back to $0.4/lb or January 2020 level. The recovery is led by reopening of scrap deposit centers and higher aluminum prices. Many scrap deposit centers are now operating at 150% of usual run-rate and supply should further ease. UBC return rates are still below normal due to partial Covid-led restrictions. Recovery in industrial scrap generation should further elevate scrap spreads.

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