Sparks fly as a worker supervises the flow of hot liquid metal as it flows from a furnace at a metallurgical plant in Norilsk, Russia (Photographer: Andrey Rudakov/Bloomberg)

Why Morgan Stanley Prefers Vedanta Over Hindalco

Morgan Stanley prefers oil-to-metals giant Vedanta Ltd. over aluminium producer Hindalco Industries Ltd. amid concerns over the implications of a potential tariff war that could be triggered by protectionist policies in the U.S.

The research firm downgraded Hindalco to ‘equalweight’ from ‘overweight’ on account of peaking volumes, higher costs for Indian businesses and potential downside risk to its U.S. unit Novelis’ margins. It also cut the company’s price target to Rs 256 from Rs 292 earlier, implying a potential upside of 15 percent. Sixteen out of 28 analysts tracked by Bloomberg have a ‘buy’ rating on the stock.

In comparison, Morgan Stanley maintained an ‘overweight’ rating on Vedanta as it expects operating income to grow on lower costs, but reduced the price target to Rs 386. That’s still an upside potential of 25 percent. Sixteen of 23 analysts rate the company a ‘buy’.

The brokerage’s review comes amid worries over possible retaliation to Trump’s 25 percent tariff on steel and 10 percent on aluminium imports from all countries, except Canada and Mexico. Indian firms hardly supply to the U.S. “[But] responses and rhetoric measures by other government and potentially more trade restrictions by the U.S. are so far in our view the downside scenarios,” Marie Diron, managing director, sovereign risk group at Moody’s Investors Service, told BloombergQuint in an earlier interview.

Shares of Hindalco Industries have declined 1.45 percent while those of Vedanta dropped 4.75 percent since the import tariffs were announced. That compares with a 3.35 percent decline in the benchmark S&P BSE Metal Index. Hindalco Industries trades at 23.5 times its estimated earnings for the next financial year starting April and Vedanta trades at 15.4 times, according to Bloomberg data.

Morgan Stanley On Hindalco

  • Expect downside risks to Hindalco's domestic business from the U.S. tariffs.
  • Any potential rise will be offset through price increases.
  • There could be a lead/lag based on customers’ ability to pass on higher costs to end-users.

Morgan Stanley On Vedanta

  • Lower alumina costs and operating efficiency in zinc will drive growth in earnings before interest, taxes, depreciation and amortisation in the next financial year.
  • Compounded annual growth rate for zinc business estimated at 15 percent and 51 percent for the India and global business respectively till the year-ending March 2020.
  • Compounded annual growth rate in volume of aluminium operations estimated at 17 percent till the year-ending March 2020.