Hindalco Ltd, which continues to benefit from favorable demand and realization scenario, plans to use improved cash flows in a balanced manner to drive growth. In the much-awaited capital allocation plan revealed by the company, focus remains on organic growth, debt reduction and improving shareholder returns.
From the $1.0-1.2 billion per annum annual cash flow that the company expects to generate after maintenance capex, it intends to use half for growth capex. The balance 30% is for debt reduction, and 8-10% for shareholder returns. Remaining 10-12% is planned to be retained by the company in its treasury.
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The company, thereby, has guided for allocation of $2.5–3.0 billion towards organic growth capex over the next five years. Hindalco intends to spend $1.5billion in growing Novelis' capacity from current 4 million tonne per annum (mtpa) to 4.5 mtpa. The rest $1–1.5 billion will be utilised to grow the company’s downstream business in India.
Novelis has been consistently driving the company’s earnings in the recent past and the outlook remains strong. Being a convertor of metal, the business to a large extent remains insulated from aluminium price volatility. The demand outlook continues to be driven by the preference for aluminium over plastic or glass in packaging. Also, its increasing use in automobiles due to shift from steel to aluminium is a positive. Thus investments in Novelis will be directed towards new auto lines as well as China and Brazil capacity expansion.
In India, after having completed most of the upstream expansions and having adequate smelting capacities, now the company plans to spend on downstream aluminium , copper recycling and Utkal alumina expansion.
Net debt/EBITDA, that has continued improving from the peak of 3.8x in June 2020 post completion of Aleris acquisition, is targeted to fall to 2.5x by March 2022.
Analysts at Jefferies India Ltd have raised FY22-23 EPS by 5% building higher LME aluminium price of $2,000/tonne (5% below spot), and also factoring higher capex with Hindalco’s planned spend on growth and maintenance over the next five years.
The stock, which has already given handsome returns to investors, scaled fresh 52-week highs on Tuesday with 4% gains. Analysts see more gains.
“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)" say analysts at Motilal Oswal Financial Services.
A positive outlook for Novelis, driven by recovery in auto demand and cost synergies from Aleris acquisition, strong free cash flow generation that should help reduce leverage sharply, and reasonable valuations are other reasons why analysts remain positive on the company.
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