Aluminium capex to triple over next 5 fiscals on strong demand: Report
1 min read . Updated: 30 Jan 2023, 06:02 PM IST
PremiumLong-term aluminium demand fundamentals are strong in both global and domestic markets, driven by increased spending on infrastructure, electrification, and transition to electric vehicles
New Delhi: Solid long-term demand fundamentals and expectation of healthy operating margins, despite some moderation this fiscal, will spur domestic aluminium makers to spend around ₹70,000 crore over the next five fiscals through 2027 to expand capacity, according to a latest report by rating agency Crisil.
“This capital expenditure (capex) would be thrice what was incurred in the past five fiscals," the report said.
A Crisil Ratings study of three domestic primary aluminium producers, which account for the entire capacity of 4.1 million tonne (MT) in the country, indicated as much.
According to the rating agency, the long-term aluminium demand fundamentals are strong in both global and domestic markets, driven by increased spending on infrastructure, electrification, and transition to electric vehicles amid growing concern over emissions that is likely to keep global capacity addition in check.
“Worldwide demand may remain flattish in calendar 2023 amid recession fears. We expect the medium-term compound annual growth rate to be around 2%," the report said.
The domestic market is likely to witness more robust growth of 6-7% in the near term, and 4-5% over the medium term. Increasing green transitions in the economy would lend traction to this demand, it added.
“Increase in downstream capacities will buff up product portfolios, while backward integration will help sustain cost-competitiveness. India is already among the lowest-cost producers in the world. That will help sustain the high share of exports in revenue mix. India exported more than half of its annual output over the past five fiscals. Consequently, even after significant smelter capacity addition, utilisation should remain above 90% over the next two fiscals," said Ankit Hakhu, director, Crisil Ratings.
According to Crisil, the profitability is expected to stabilise at 27-29% next fiscal, after falling from 36% last fiscal to 13% in the first half of this fiscal. Commodity price inflation has started to ease and the withdrawal of monsoon has improved domestic coal availability -- including from captive mines, leading to higher materialisation of linkage coal.
“Realisations are expected to remain rangebound at $2,400 per tonne next fiscal (~$2,774 on average last fiscal), with low global inventory and recent production cuts in Europe and China partly offsetting easing global demand," it added.
“Despite moderation in the first half of this fiscal, annual operating profit this fiscal and the next will likely be sufficient to cover the planned capex without any major impact on leverage, thereby supporting credit profiles. The net debt to earnings before interest, tax, depreciation, and amortisation (Ebitda) ratio is expected to remain below 2.5 times, while interest coverage is projected to remain healthy at above 8 times over this and next fiscals (less than 2x and ~10x, respectively, last fiscal). Further, cash buffers will be healthy at more than 1x of debt obligations,“ said Ankush Tyagi, Associate Director, CRISIL Ratings.
