Why Vedanta and NALCO Stocks Could Crash 40%: InCred’s Warning

The aluminium sector is facing a significant storm as brokerage firm InCred Equities issues a stark warning to investors. With aluminium prices in freefall, the brokerage has advised an exit from aluminium stocks, citing a potential downside of 30% to 40%.

The Fallacy of the Supply Scarcity Narrative

A primary driver behind the current bearish sentiment is the correction of market perceptions regarding aluminium supply. InCred Equities argues that investors have been incorrectly valuing aluminium as a primary metal subject to tight supply constraints, similar to crude oil or coal.

Unlike consumable commodities, aluminium is an "above-ground circular metal." The brokerage highlights a massive reserve of approximately 1.5 billion tonnes of aluminium currently available above ground. Remarkably, nearly 80% of all aluminium ever produced remains part of the usable metal pool. This means the real supply metric is not just primary smelter output, but the efficiency of the scrap collection, sorting, and remelting cycle.

Lessons from the Chinese Market

The brokerage points to China as a critical case study to debunk the structural deficit theory. While China’s primary aluminium output has risen from 41.6 million tonnes (mt) in 2023 to 44.0 mt in 2024—approaching its 45 mtpa policy cap—the "tightness" is an illusion created by ignoring secondary sources.

InCred's data shows that China’s secondary aluminium consumption is set to rise from 12.7 mt in 2024 to 13.35 mt in 2025. Furthermore, scrap imports are expected to increase from 1.7 mt in 2023 to 2.02 mt in 2025. With 80% of China's scrap supply being domestic, the primary deficit is being effectively replenished through recycling and rising secondary capacity.

Geopolitical Risks and Price Correction

While Middle East disruptions initially caused concern, InCred views these as temporary supply shocks rather than structural ones. Although 2.2 mtpa of primary capacity was affected, supply from major players like Qatar Aluminium and Alba is expected to normalise quickly.

As the "war-risk premium" begins to unwind, the London Metal Exchange (LME) aluminium prices are expected to correct. With prices vulnerable to a drop toward $800 per tonne, the current valuations for major Indian players appear overstretched.

Impact on Indian Aluminium Stocks

The warning comes at a time when domestic metal stocks are already under pressure. In the past month, these stocks have seen declines of up to 16%. Specifically:

  • Vedanta Aluminium Metal: Dropped over 4% recently and is down more than 10% since its market listing following the mega demerger.
  • NALCO: Has seen declines of approximately 3%.
  • Hindalco Industries: Shares have fallen around 2%.

Given the stretched valuations, InCred has issued a ‘Reduce’ call on both NALCO and Hindalco Industries, warning of a massive correction on the horizon.

Key Takeaways

  • Potential 40% Downside: InCred Equities warns of a significant crash in aluminium stocks due to overvalued market perceptions.
  • The Recycling Factor: Unlike oil, aluminium is highly recyclable; the massive "above-ground" pool of scrap mitigates primary supply deficit fears.
  • Bearish Outlook on Leaders: Major Indian names like NALCO, Hindalco, and Vedanta Aluminium face valuation risks as LME prices face downward pressure.