Hindalco Industries Ltd: Buy

CMP: Rs.89.85

Courtesy: Quandl.com

Stock of India’s Hindalco Industries Ltd has experienced a correction of around 6% over the last two trading sessions on the National Stock Exchange of India. Some experts say the slide in the Aditya Birla Group subsidiary is due to a similar dip in the price of primary aluminium on the LME.

However, here are few of the positive points based on which you can buy the share of Hindalco Industries Ltd, for a short term target of Rs.97:

(i)  The sector has experienced a rise in demand of 6%, Chinese speculators appear to be responsible for most of the demand.

(ii) According to  Abhishek Poddar of Kotak Securities Ltd: "A large chunk of inventories is held by traders, banks or is locked in financial deals. Any rise in the interest rates will increase the cost of carry and lead to sharp unwinding" — a material risk to aluminium prices. However, the interest rate is on a downward trajectory in India and the in the US too, the Fed appears to be treading this path very carefully. On Friday, Labor Department figures showing that U.S. job growth slowed in April kept alive the bet on riskier markets. The data gave the Federal Reserve little reason to raise interest rates soon, economists said - -a move that could withdraw any further support to the USD.

“I was like ‘phew,’ ” said Paresh Upadhyaya, director of currency strategy at Pioneer Investments, after the weaker-than-expected jobs numbers were announced on Friday. “I breathed a sigh of relief that this risk rally will continue.”

Mr. Upadhyaya, whose firm manages $249 billion, has shut down his bullish positions on the dollar in recent months in favor of emerging-market currencies, including the Indian rupee, Russian ruble and Argentine peso.

(iii) Base metals edged higher in Tuesday morning LME trading, pausing after Monday’s correction lower. Better-than-expected Chinese data helped prices to consolidate. The Chinese CPI rose 2.3%  year-on-year in April, in line with consensus and unchanged from last month, while its PPI fell by a less-than-expected 3.4% compared with -4.3% in March. China's April consumer inflation and producer price data painted a mixed picture of deflationary pressures in the world's second largest economy.

Expectations of further monetary policy easing had already been dented by strong March China data, but economists are divided over whether that was just a blip or a more sustainable trend.
"I think monetary policy will be kept steady with structural easing - targeted easing for some sectors," said Nie Wen, economist at Hwabao Trust in Shanghai.

“[Metals] are clearly finding support from the less steep decline in producer prices in China in April. One role in this is likely played by the fact that the dampening effect of commodity prices is gradually moving away from the year-on-year comparison,” Commerzbank noted.

(iv) Hindalco Ltd has no plans for adding capacity in the near future, and the current facilities are running at 85% of the existing capacity. At present, Hindalco’s stock is trading at seven times EV/EBIDTA (enterprise value to earnings before interest depreciation and tax). Historically, most metals and mining companies, both in India and worldwide, trade at between five and six times EV/EBIDTA--which means CMP of Hindalco Industries Ltd is on the boundary line. So any uptick in the Q4FY16 result (on 28 May, 2016), could give a sudden push in the share price. 

(v) The powerful rallies that have lifted stocks, crude oil and emerging markets for the past three months have one important thing in common—the falling dollar. A  stronger U.S. currency, makes dollar-denominated commodities more expensive for non-U.S. firms.

Morgan Stanley’s Global Risk Demand Index, which measures risk appetite by analyzing moves in markets such as stocks, commodities, and emerging markets, is moving nearly in the opposite direction of dollar strength. The correlation reached negative 86% in early April.

A large negative correlation means risky assets tend to fall when the dollar gains and rise when the dollar falls. As of May 5, the correlation was minus-76%.

The Fed began the year with plans to raise interest rates four times after boosting rates by a quarter of a percentage point in December. But in March, Fed Chairwoman Janet Yellen signaled that the central bank was in no hurry to raise interest rates, citing slower global growth.

Federal-funds futures, used by investors and traders to place bets on central-bank policy, showed Friday that the odds for a rate increase at the Fed’s June meeting were 13%, while the chances of a rate increase at the December meeting were 61%, according to CME 

(vi) Global oil demand is catching up with supply and the market should see a “rebalancing” in the second half of the year as cheaper crude has forced some production to close, Qatar’s Energy Minister Mohammad Al Sada said.

The rate of production shutdowns is accelerating and global demand is increasing, especially for products such as gasoline, Al Sada said in an e-mailed statement on Tuesday. “This trend is likely to increase further from next month due to the onset of the summer driving season,” the minister said.

The Organization of Petroleum Exporting Countries will review the current oil market and the outlook for supply and demand at its next meeting on June 2, Al Sada, who is also OPEC president, said in the statement. 

Oil prices rose Tuesday on expectations that supply outages from Canada to Nigeria would help to alleviate the global glut of crude.

Light, sweet crude for June delivery settled up $1.22, or 2.8%, to $44.66 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, rose $1.89, or 4.3%, to $45.52 a barrel on ICE Futures Europe.

Oil-production outages in some regions are helping reduce crude output, boosting expectations that the global glut of crude that has battered prices since mid-2014 could be shrinking. 

Meanwhile, the US Energy Information Administration (EIA) has revised its earlier crude oil price forecast, originally issued in April, but now expected to be around $40.52 per barrel, up $6 from its April estimates of only $34.73 per barrel for the average price of crude in 2016.

"Improving economic data, growing supply disruptions, and falling U.S. crude oil production and rig counts contributed to the price increase," the EIA said in its Short-Term Energy Outlook report released recently.

Oil has rebounded after slumping to a 12-year low in January on signs the global glut is easing as U.S. output decreases. Production outside OPEC will drop the most since 1992 as the U.S. shale oil boom falters, the International Energy Agency said in April.

You can see from the chart above, that even after correction the Aluminium prices are still substantially higher, than the bottom formed at the end of 2015. At the end of last week, aluminium prices were 5% higher than the average for the previous 26 weeks.

Therefore, unless the scrip of Hindalco Industries Ltd breaks down below Rs.89.30 on closing basis, the traders can take short term BUY POSITIONS (above Rs.91.20 buy more), for targets of Rs.97-103.