Why Vedanta, NALCO, and Hindalco Stocks Face a Potential 40% Crash

Investors in the Indian metals sector are facing a significant warning as brokerage firm InCred Equities turns bearish on aluminium. The firm has issued a stark advisory to exit aluminium stocks, citing a potential downside risk of 30% to 40% due to structural miscalculations in market valuation.

The Circular Metal Fallacy: Why Supply Concerns are Misleading

The core of InCred Equities' bearish stance lies in how the market perceives aluminium supply. While many investors view aluminium as a primary metal subject to strict supply constraints—similar to crude oil or coal—the brokerage argues this is a fundamental error. Unlike consumed commodities, aluminium is an "above-ground circular metal."

According to the report, nearly 1.5 billion tonnes of aluminium remain available above the ground, with approximately 80% of all aluminium ever produced still part of the usable metal pool. This means the true supply metric is not just primary smelter output, but the efficiency of collecting, sorting, and remelting scrap. The scarcity narrative is being challenged by the rising capacity of secondary aluminium production.

Lessons from China and the Middle East Disruption

InCred highlights China as a prime example of this supply-demand disconnect. Although China’s primary aluminium output rose from 41.6 mt in 2023 to 44.0 mt in 2024 (approaching its 45 mtpa policy cap), this "tightness" is being offset by a massive secondary pool. China’s secondary aluminium consumption is projected to rise from 12.7 mt in 2024 to 13.35 mt in 2025, supported by increasing scrap imports and domestic recycling.

Furthermore, the brokerage dismisses the supply shocks caused by Middle East disruptions as temporary rather than structural. While approximately 2.2 mtpa of primary capacity was affected, supply from major players like Qatar Aluminium and Alba is expected to normalize quickly. As the war-risk premium unwinds, the London Metal Exchange (LME) aluminium prices are expected to undergo a correction.

Stretched Valuations and Sector Downturn

With aluminium prices vulnerable to a fall toward the $800/ton mark, domestic major players are seeing their valuations stretched thin. InCred has issued a 'Reduce' call on NALCO and Hindalco Industries, warning that current prices do not reflect the looming risks.

The impact is already visible in the markets. Vedanta Aluminium Metal shares recently dropped over 4% in a single session and have tumbled more than 10% since their listing following the mega demerger. Other major players have also felt the heat: NALCO shares declined by over 3%, while Hindalco Industries fell by approximately 2%. Over the past month, these metal stocks have collectively seen declines of up to 16%.

Key Takeaways

  • Significant Downside Risk: InCred Equities predicts a potential 30–40% crash in aluminium stocks due to overvaluation and changing supply dynamics.
  • Secondary Supply Buffer: The market is overlooking the "circular" nature of aluminium; massive amounts of scrap and secondary production are offsetting primary supply shortages.
  • Bearish Ratings: Investors are advised to exit or reduce holdings in major names like NALCO, Hindalco Industries, and Vedanta Aluminium.