Hindalco Industries - Status quo maintained - ICICI Securities
(Time Zone: Arizona, USA)
Hindalco management delineated the company's capital allocation strategy. FCF guidance stands at US$1bn-1.2bn post normal working capital and maintenance capex; cumulative FCF (pre growth-capex) is guided at US$5bn-6bn over the next five years. Management targets deleveraging of US$2.9bn over the same period - of which US$2.6bn will be in Novelis and US$0.3bn in Hindalco (India). Growth capital has been earmarked at US$2.5bn-3bn over the next three years. This does not leave much room for return to shareholders (amounts to Rs3-4/share based on 8-10% of FCF). Also, to underline the deleveraging efforts, it translates to Rs20/share p.a. Thus the company reinstated status quo and strategic continuum. Maintain HOLD with a revised target price of Rs306/share (earlier: Rs270) at 0.9x FY23E P/B.
- No incremental capex announced. Organic growth capex is US$1.5bn for Novelis and US$1.1bn for Hindalco India, over the next five years. Management clarified that no big-ticket inorganic acquisition is under consideration. Some more strategic capex may be announced down the line. As of now, focus remains on recycling, rebalancing and brownfield expansion, case in point being China Cold Mill expansion and freeing up ~200ktpa capacity in Ulsan, South Korea. Most of the Novelis capex announced will complete by FY22, with some amount left as future optionality. Domestic capex will be along expected lines for the next five years focusing on downstream aluminium and copper. Domestic strategy toes familiar lines with no inclination towards Indian aluminium upstream and remains to us the most compelling and attractive factor of the strategy. Copper upstream can be targeted after five years.
- Consolidated 'net debt to EBITDA' to reach 2.5x in less than two years, from estimated 3x as at FY21-end. Novelis intends to reduce its debt by US$2.6bn. Repayment of bridge loans to the extent of US$1.1bn is expected by the end of FY21; US$500mn was already repaid in Q3FY21 and the rest will be repaid in Q4FY21. Term loan of US$1.7bn is due in CY22; of this, US$1.1bn will be refinanced and US$500mn will be repaid. Management is looking at all possible modes of refinancing including green bonds. Hindalco (India) operations will consider downstream capex and will repay only US$270mn in CY22.
- Higher downstream capex can improve consolidated RoE. Also reducing contribution of upstream Aluminium business along with reducing consolidated debt will i) reduce earnings volatility to Aluminium price fluctuations and ii) significantly reduce loss probability. As and when Novelis earnings normalises (management continues to guide for US$475-500/te EBITDA guidance for Novelis), consolidated RoE of 9-10% is possible. Maintain HOLD.
- ESG targets don't allow easy comparison. While refraining from Scope 1/2/3 emission target goals, management highlighted the following under the environmental section i) Net carbon neutrality by 2050 ii) Zero waste to landfill by 2050 iii) water positivity by 2050 and iv) No net loss on bio-diversity by 2050. Management also targets to achieve 25% reduction in Aluminium specific energy consumption and highlights the strategy of adding renewable assets (including in an asset light manner)
Shares of HINDALCO INDUSTRIES LTD. was last trading in BSE at Rs.333.25 as compared to the previous close of Rs. 315.85. The total number of shares traded during the day was 1438181 in over 10766 trades.
The stock hit an intraday high of Rs. 338.1 and intraday low of 316.65. The net turnover during the day was Rs. 472827220.
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