Hindalco management delineated the company’s capital allocation strategy. FCF guidance stands at $1bn-1.2bn post normal working capital and maintenance capex; cumulative FCF (pre growth-capex) is guided at $5bn-6bn over the next five years. Management targets deleveraging of $2.9bn over the same period — of which $2.6bn will be in Novelis and $0.3bn in Hindalco (India). Growth capital has been earmarked at $2.5bn-3bn over the next three years. This does not leave much room for return to shareholders (amounts to `3-4/share based on 8-10% of FCF). Also, to underline the deleveraging efforts, it translates to `20/share pa. Thus the company reinstated status quo and strategic continuum. Maintain ‘Hold’ with a revised target price of Rs 306/share (earlier: Rs 270) at 0.9xFY23E P/B.
No incremental capex announced. Organic growth capex is $1.5bn for Novelis and $1.1bn for Hindalco India, over the next five years. 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.
Higher downstream capex can improve consolidated RoE. Also reducing contribution of upstream Aluminium business along with reducing consolidated debt will reduce earnings volatility to Aluminium price fluctuations and significantly reduce loss probability. As and when Novelis earnings normalises (management continues to guide for $475-500/te EBITDA guidance for Novelis), consolidated RoE of 9-10% is possible. Maintain ‘hold’.