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Hindalco Ltd, part of the Aditya Birla Group, has laid out a five-year capital allocation roadmap that focuses on organic growth, debt reduction and improving shareholder returns. At the consolidated level, the company is expected to generate over $1-1.2 billion cash flow per annum, post its normal working capital and maintenance capital expenditure. It intends to use half of this for growth capex. The balance 30% will be used for debt reduction and 8-10% for returning cash to shareholders. The remaining 10-12% is planned to be retained by the company.

“Allocation towards growth capex is considered at $2.5-3 billion over the next 5 years" the company said in a statement. Of this, $1.5 billion is for growing Novelis Inc.’s capacity from the current 4 million tonnes per annum (mtpa) to 4.5 mtpa. The remainder will be utilized to grow its the company’s downstream business in India.

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Novelis has continued to remain a key growth driver for Hindalco’s earnings. Being a convertor of metal, Novelis’ profits to a large extent remain insulated from aluminium price volatility. Looking at the cyclical nature of the Indian business, increased investments in Novelis bode well for future prospects, say analysts.

On a strong footing
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On a strong footing

For Novelis, the demand outlook remains firm driven by aluminium being preferred to plastics or glass for usage in packaging. The increasing use of aluminium in the automobile sector viz-a-viz steel bodes well, as margins in this segment are higher.

In India, after having completed most of the upstream expansions and having adequate smelting capacities, the company now plans to spend on downstream aluminium, copper recycling and expansion at its Utkal Alumina International Ltd facility.

Net debt/Ebitda is expected to drop from the peak of 3.8 times in June 2020 (post-Aleris acquisition completion by Novelis), to 2.5 times by March 2022. Ebitda is earnings before interest, tax, depreciation and amortization.

Analysts raised Hindalco’s earnings estimates after factoring in its planned spending on growth over the next five years. The stock jumped 5.7% on Tuesday. “Hindalco is our preferred non-ferrous pick owing to its strong profitability in the India aluminium business from its low-cost integrated operations (top quartile globally)," said analysts at Motilal Oswal Financial Services.

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