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BENGALURU/MUMBAI : Hindalco Industries Ltd has shifted its priorities and, prima facie, investors are cautious. The company has decided to use about 75% of its cash flow (post normal working capital and maintenance capex needs) towards growth capex. This is higher than the 50% allocation last year.

Cash flow utilization towards debt reduction is expected at about 15% now vis-à-vis 30% in the year-ago, Hindalco said at its Investor Day 2022 meet held after market hours on Wednesday.

Gradual expension
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Gradual expension

The shift in focus towards more growth is not without reason. Debt burden is lower now with the company making the best of the high aluminium price environment. Consolidated net debt-to-Ebitda has dropped to 1.62 times at the end of December 2021. This was as high as 3.83 times in June 2020. Ebitda is earnings before interest, taxes, depreciation, and amortization.

Declining load
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Declining load

Investors have rewarded the company’s efforts to lower debt. This is also supported by about a 60% surge in aluminium prices on the London Metal Exchange (LME) over the last year. In the same span, Hindalco’s shares gained about 74%, though the stock was 5% lower on Thursday on the NSE.

This came even as the company addressed investor concerns on growth, if any. At its meet, Hindalco announced a robust growth capex pipeline of $8 billion (including optional capex) over FY23-27. It will expand capacities across its overseas subsidiary, Novelis Inc., and India operations, comprising a spend of $4.5 billion-$4.8 billion and $3.4 billion, respectively. Of this, capex worth $6 billion is under assessment.

“It is difficult to understand when about 70% of capex is under evaluation, why did the management announce all these new projects," Motilal Oswal Financial Services analysts said in a report on 31 March. “The major projects under evaluation are brownfield and greenfield rolling mills, aluminium smelters, and an alumina refinery, all of which have a huge impact on operating cash flows and Ebitda," the report said. Hindalco may incur an annual capex of more than $2 billion over FY24-26E, if these projects are approved, according to the brokerage.

If aluminium prices remain high on LME then fulfilling capex requirements should not be a problem. The outlook on aluminium prices is firm on account of restricted supply, energy cost push and the anticipated demand from increased adoption of aluminium-intensive electric vehicles. Also, demand from segments such as beverage cans, aerospace, and specialties is likely to remain high.

On the capex plans, analysts from Jefferies India find the greenfield expansion plan of $2.5 billion by FY26 in the US aggressive, considering the capital cost of about $4,200 per tonne for North America and Ebitda per tonne of about $530 in the last six quarters.

As such, this could be a factor weighing on the investor sentiment post the meet. The stock fell 10.5% from its 52-week high on 29 March. Even so, investors are sitting on handsome gains, which may limit notable near-term upsides. “We continue to like Hindalco amid strong aluminium prices and a healthy outlook for Novelis, but we expect stock returns to be moderate versus the last 1.5 years," said Jefferies’ analysts.

For the March quarter, Hindalco’s performance would see an adverse impact of higher energy and shipping costs because of disruptions in supply chains as a result of geopolitical tensions. However, overall, the company is shielded to an extent as it obtains a significant portion of coal from Coal India Ltd at notified prices for its domestic business. Further, cost benefits could accrue from the Chakla and Meenakshi coal mines that are expected to be operational by FY25 and FY27, respectively.

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