Kotak Institutional Equities has upgraded Hindalco Industries Ltd shares to 'Buy' from 'Reduce' earlier and revised its target price upward by 13 per cent, saying concerns around scrap spread, tariffs in the US and aluminum prices on Hindalco and Novelis are overblown.
Calling such concerns as misplaced, Kotak said scrap spreads have bottomed in Q3FY25 and are unlikely to worsen further. It said the pass-through sales agreement at Novelis would protect against potential tariffs, and scrap benefits should expand as seen historically.
"The upcoming expansion projects should put the India business back on the growth path while maintaining low leverage. We raise earnings and FV to Rs 725 (from Rs 640). Upgrade to BUY (from REDUCE)," it said.
It has increased its EPS estimates by 2.5 per cent for FY26 and 3.2 per cent for FY27 on higher margins at Novelis. It sees upside risk and higher CWIP value for Bay Minette as it is nearing completion
Hindalco would embark on upstream growth capex in India, mainly from 2HFY26E, on 180 KTPA Ali smelter, 0.85 MTPA alumina refinery and 0.3 MTPA copper smelter. These projects, with capex of $1 billion each, would be value-accretive, with early mid teens RoCEs and put the India business back on the growth path, Kotak said.
The broking firm believes the net debt/Ebitda for Hindalco should peak at 1.3 times in FY2027 despite negative free cash flow over FY2026-28.
"We expect aluminum prices to remain firm to incentivize fresh capacity outside of China, given a deficit market in the medium term (CY2025-27E). We see stable demand to outperform supply over CY2025-27E, with limited new capacity, given the capacity cap in China and the thin pipeline outside China," it said.
On the proposed 25 per cent tariff by the US, Kotak said the development has raised Midwest premiums by 65 per cent to ¢37/lb in 2025. Scrap prices tend to underperform rising Ali prices, elevating scrap spreads.
"A similar phenomenon had played out in the 2018-19 period of tariff uncertainty, and it now poses an upside risk for Novelis’ margins in FY2026," the brokerage said.