Hindalco Industries Ltd cut its five-year capital expenditure plan by 43% in response to Novelis' near-term forecast being negatively impacted by the downturn in the economy, lower demand in North America and Europe, and the energy crisis.
Novelis is a subsidiary company of Hindalco Industries and it is a producer of rolled aluminum and an aluminum recycler.
Destocking in the can market, weak demand brought on by changes in consumer consumption habits in the post-Covid era, inflationary pressures on various cost items, a lag in cost pass-throughs in contracts, and difficulties with specialty end-market demand as a result of higher interest rates and subpar economic growth in North America and Europe have all been challenges for Novelis.
At its annual investor day, the senior management reported a significant decrease in growth capital expenditure (capex) to US$4.5 billion, to be spent over the next five years, from US$7.9 billion announced a year earlier.
According to the management, Novelis' margins would continue to suffer from short-term market headwinds, and normalisation is only anticipated by the end of FY2024E.
Additionally, the management thinks Novelis' margin difficulties are temporary and that growth plans are postponed rather than canceled.
Projects worth US$1.6 billion that Novelis has postponed include rolling capacity in Brazil, Europe, and downstream capacity in China. The company is still concentrating on downstream aluminium capacities in India, while deferring upstream facilities for the time being.
What does brokerages say?
Kotak Institutional Equities Ltd
The reduction in expansion capex is interpreted by the brokerage as an indication of low confidence in operating cashflows. In contrast to its previous policy of using 15% of operating cash flow (OCF) for deleveraging, the company does not expect to use OCF to reduce leverage any more. The brokerage has decreased Novelis' margins while decreasing EPS (3%/4% for FY2024/25E) and fair value from ₹470 to ₹455 with an 'add' rating.
"We have trimmed our capex estimates and cut Novelis’ EBITDA estimates by 3.3%/4.1% for FY2024/25E, and now assume an EBITDA of US$445/475/ton in FY2024/25E. The stock trades at an inexpensive 5.2X EV/EBITDA FY2025E; however, the uncertain outlook about Novelis’ earnings should keep the stock under pressure in the near term," said the brokerage.
PhillipCapital (India) Pvt Ltd
Despite ongoing short-term obstacles and a sluggish recovery, the brokerage has maintained a favourable outlook on Hindalco. It anticipates that domestic performance will improve due to lower cost of production (CoP) (falling prices for coal, caustic soda and anodes), while Novelis will continue to slog its way back to sustainable EBITDA/tonne of US$ 525 in a few years.
"Deployment of cash-on-growth projects bodes well for the company. However, the benefits of all this capex to accrue from FY25 only. Overall, we believe Hindalco's approach towards slower expansion policy to match its cash flows is a prudent one. Strong cash flow and a strengthening balance sheet remain key investment points. We have factored in Novelis EBITDA/tonne at US$ 461/tonne and US$ 497/tonne for FY24E and FY25E with volume growth CAGR of 2.5% over FY23-FY25E. We also expect domestic business to contribute c. ₹100 billion in EBITDA during FY24. We maintain our 'buy' rating on the stock with target price of ₹505," added the brokerage.