📉 Why is Hindalco's Share Price Falling?
Despite posting record-breaking profits, Hindalco seems to be in trouble. Here's what's weighing on the company stocks.
What does it take for a stock’s price to rise?
Good performance by the company?
Good economic conditions? or
Good investor sentiment?
The correct answer could be any of the above. And if even one of these factors goes for a toss, you can expect a downturn in the stock’s price.
Sounds complex? Let’s take the example of Hindalco, a market favourite.
📊 Let’s Talk Numbers
Hindalco’s shares gained a little today, but overall, they have fallen quite a bit since March when they hit their 52-week high.
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In fact, the stock hit its 52-week low last week. Â
Surprisingly this comes after a smashing performance in both FY22 and Q1 of FY23.
In fact, Hindalco saw its profit grow 48% YoY (year-on-year) in Q1, and its EBITDA (earnings before interest, taxes, depreciation and amortization) grew 27% YoY, both hitting their all-time highs.
Then why is the stock down in the dumps?
Because of global economic factors.
🤔 What’s Going on with Hindalco?
First things first, let's clarify what Hindalco does.
It is the world’s largest producer of aluminium and copper.
Now, 60% of its operating profit comes from its wholly-owned subsidiary, Novelis, which is based in the US.
And a majority of Novelis’ revenue comes from making cans for beverages.
Hindalco also provides materials for construction of buildings, roads, infrastructure and so on.
Sadly enough, all these operations have been threatened by one thing: inflation. That’s because Hindalco is a cyclical stock, that is impacted by economic factors.
Though inflation in the US has come down from its all-time high it is still 8.3%.
Because of this demand in a lot of sectors is going to see a setback.
And the beverage industry is one of them.
So, the demand for cans is set to decline.
The industry is only set to grow by 2.5-3% as compared to the 10%-12% growth it witnessed in 2020-2021.
That’s obviously bad for Novelis and Hindalco.
And what’s worse is that infrastructure development could also slow down.
Because to control this inflation, the US central bank is set to continue raising interest rates. It has already been pretty aggressive about rate hikes and has said it will continue to do so, even if rate hikes eventually bring in a recession.
High interest rates = high borrowing costs for companies, so many may decide not to go ahead with infrastructure development plans, especially as a recession could soon be coming.
In fact, Ball Corporation, one of Novelis’ key clients, has already postponed the construction of a new project because of this.
And with inflation once again rising in India as well, Hindalco may see a similar decline in demand.
Plus slowing demand in China due to lockdowns and lower demand in Europe due to less energy (Europe is currently facing an energy crisis due to the Russia-Ukraine war) for smelting, the demand for metals is falling.
So, the prices of metals like aluminium (down 41% from March) are falling, which is super bad for Hindalco right now.
And that’s just the demand side of things, the supply side doesn’t look any better.
You see, Hindalco uses coal to smelt aluminium and copper. And the price of coal is super high right now.Â
As we mentioned earlier, Europe is facing energy shortages because Russia has shut down a natural gas pipeline to the continent. Most European countries had anyway reduced imports of Russian coal and gas. But they need to keep on the light somehow.
So, they are looking for coal elsewhere, impacting the entire demand-supply chain of coal.Â
What's more, coal prices in India are also going up because of high demand.Â
This is raising costs for Hindalco.Â
But all is not gloom and doom.
A rise in automobile sales, brought on by low crude prices and easing semiconductor shortages, could help increase Hindalco's revenue a little.
And the company is also taking measures to reduce its dependence on coal and has set up a solar power plant to meet its energy demands.
While this may help Hindalco a little, what it really needs is demand for aluminium to rise again.
However, with inflation refusing to go down and recession knocking at the door, will the company be able to perform as well as it did last year?Â
âš¡In a line: Hindalco just had one of its best quarters but it may be in trouble now because of global economic factors.
💡Quick question: What other company do you think will be impacted by these factors?
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