Hindalco, NALCO downgraded to ‘reduce’ by InCred Equities. Here are 3 reasons why

Shares of Hindalco, and National Aluminium Company (NALCO) declined 3% and 4%, respectively, on Tuesday. Citing weak growth prospects in the coming quarters, domestic brokerage firm InCred Equities downgraded both companies to reduce which led to this decline.

InCred assigned a target price of Rs 631 to Hindalco, the Aditya Birla Group company, and forecasted a downside potential of 30% from the last close of Rs 907. For state-owned NALCO, the domestic brokerage pegged the target price at Rs 302 per share, a downside of 13.21% from the previous close.

For Hindalco, aluminium’s recent rally appears largely macro-driven, particularly on expectations of a weaker U.S. dollar, rather than tight underlying fundamentals, according to InCred. At current price levels, most primary smelters globally remain viable, limiting supply-side discipline. Elevated prices are also incentivising higher scrap collection; the primary-over-scrap spread is running at two standard deviations above the long-term average, a level that typically triggers a strong recycling response.

The global used-aluminium pool stands at 1.4 billion tonnes, and the scrappage rate could rise from the historical 1.4–1.5% to as high as 1.7% during periods of strong price incentives, according to data from the International Aluminium Institute (IAI). As macro support fades and scrap supply improves, aluminium prices are expected to decline by around 20% over the next year.

Capex could hurt balance sheet

Hindalco Industries is undertaking a significant capex programme of Rs 700 billion over FY26–FY28, which is likely to increase balance sheet leverage. As capital work-in-progress rises, the market may begin assigning incremental value to these ongoing investments. Historically, during such capex cycles, the company has traded at around 7.5x EV/EBITDA.

Aluminium prices to decline

A moderation in aluminium prices is likely to weigh on NALCO’s earnings, though higher alumina volumes could partially cushion the impact. However, if scrap continues to dominate incremental metal supply, the sustainability of aluminium prices around US$2,500/t remains a key question. The assumption builds in alumina prices at US$325/t for FY27F — about 13% of the projected aluminium price — implying a rise from 10% in FY26F to 13% in FY27F. This assumption appears relatively optimistic, yet EBITDA is still expected to decline to Rs 61.7 billion in FY28F from Rs 72.6 billion in FY26F.

For NALCO, its alumina expansion is being commissioned at a time when alumina prices are softening. With incremental metal supply increasingly coming from scrap rather than primary smelting, the long-term demand trajectory for alumina remains uncertain. Historically, alumina prices have traded at around 16–17% of aluminium prices, but recently this ratio has dropped to nearly 10%, suggesting some degree of delinking between alumina and aluminium pricing trends.

EBITDA expected to fall

The potential decline in aluminium prices is expected to weigh on earnings, with EBITDA projected to fall to Rs 260 billion in FY28F from Rs 366 billion in FY26F. This could push the net debt-to-EBITDA ratio above 2 by FY28F. While this level is not alarming, the estimates assume no increase in working capital as aluminium prices decline.

“NALCO is trading at a significant premium valuation of 4× P/BV; however, given the upcycle, on an EV/EBITDA basis, the stock is still near its historical average. We continue to believe that P/BV is the right metric to evaluate the company; however, to account for the upcoming expansion, we value it at 7.5× FY28F EV/EBITDA to arrive at a new target price of Rs 302,” the brokerage said in a note dated February 16.

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