Hindalco Industries, an Aditya Birla Group company, has slashed capex plans by nearly half to $4.5 billion to be spent in the next five years, citing margin headwinds at Novelis, its US subsidiary. It also cited inflationary pressures, including on energy prices in Europe, and lags in cost pass-throughs as reasons.
However, margin headwinds at Novelis are transient and growth projects are deferred, not cancelled, the company’s management said in an investor’s meet.
The company has reduced capex spend earmarked for the next five years to $4.5 billion, a 43% cut, versus $7.9 billion announced a year ago, according to a report by Kotak Institutional Securities.
There are near-term headwinds that suggest a gradual recovery in Novelis’ margins, which include de-stocking in the can segment and demand weakness due to a shift in consumer consumption patterns in the post-Covid era. Further, inflationary pressures on various cost items, including European energy, which are likely to continue in 2023 and cost pass-throughs in contracts are witnessing a lag.
Challenges in specialty end-market demand due to higher interest rates and weak economic growth in North America and Europe are other reasons. The management expects near-term market headwinds to continue to weigh on Novelis’ margins, with normalisation only by end of FY24.
At Novelis, the company plans to spend $3.3 bn over FY24-28, mainly focusing on greenfield rolling capacity in the US, de-bottlenecking and recycling units across regions. Novelis has deferred $1.6 bn worth of projects – rolling capacity in Brazil, Europe and downstream capacity in China. It intends to invest the remaining in India with the company remaining focused on downstream aluminium capacities, while upstream capacities are deferred for the time being, it added.
“We see the cut in growth capex as a sign of low confidence on operating cash flows. The company also does not plan to use operating cash flow (OCF) to deleverage further versus its earlier policy of 15% OCF for deleveraging,” according to a report by Kotak Institutional Securities.
CLSA, in its report, said that Hindalco’s medium-term guidance is reiterated and capital expenditure is paced out.
According to a Macquarie report, the management reaffirmed Novelis’ target of delivering $400 million of free cash flow in FY23 and highlighted that future capex (after spending $4.5 billion) will be calibrated to match cash flows and will not be funded by debt.
On Wednesday, Hindalco’ s share price closed almost flat at Rs 403.30 on the NSE.
Hindalco Industries had posted a 62.9% fall in consolidated net profit at Rs 1,362 crore for the third quarter ended December 31, impacted by elevated input costs, unfavourable macro environment and inflationary pressures. In comparison, it had posted a net profit of Rs 3,675 crore for the same quarter of previous fiscal.