Hindalco Industries: Aligns capex with FCF trajectory

5 Apr 2023 , 10:43 AM

Recommendation: Buy

Target Price: Rs 505

Balance US$4billion growth projects would need more clarity on FCF trajectory. Recovery of EBITDA/t at Novelis to US$525/t would be key and would depend more on volume growth apart from rising pricing and cost mitigation actions. India business focus remains on growing share of VAP in Al and Cu and on improving cost position through commencing the two coal mines over FY26-28. Focus on ESG continues with interim targets across parameters.

FCF to support prioritized US$4.4 billion growth capex with target to keep leverage stable

Amid increased uncertainties for volume and hence profitability at Novelis, management has prioritized projects worth US$3.3 billion at Novelis for largely on time completion backed by expected FCF generation over FY24-26. Along with US$1.13 billion worth (largely downstream, mining) projects in India, US$4.4 billion growth capex is planned over FY24-26. Not much FCF will be used for further deleveraging while 9-10% would be used for shareholder returns.

Volume growth at Novelis key to achieving US$525/t EBITDA

Management reiterated the sustainable EBITDA guidance of US$525/t aided by gradual cost pass through to customers, cost take-outs, normalization of UBC scrap availability and improved pricing for can sheets on renewals. But apart from these, volume recovery holds the key which in near term has seen impact from destocking in North American can market and sluggishness in B&C market due to rising interest rates. With entire 400kt Bay Minette can capacity contracted out at pricing to allow 15% IRR levels, profitability outlook through 2030 is strong as per management.

India business focus on VAP and lower costs

In India, the US$1.13 billion growth capex is targeting (i) higher VAP share in Aluminium, copper and speciality alumina to expand profitability and (ii) 4.5mtpa Chakla mine which should commence by FY26 to further lower power costs. Upstream expansion for Alumina & aluminium is dependent on locking in bauxite mines and renewable power respectively. The 10-12mtpa Meenakshi coal mine is awaiting regulatory approvals and will give 100% coverage for coal needs when commissioned possibly by FY28.