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We attended Hindalco’s Investors Day and got more clarity on its capex plans, ESG targets and capital allocation policy. Key points: (i) Capex of $4.5–4.8 bn at Novelis and $3.37 bn at India operations planned through FY27E. (ii) Significant decarbonisation plans at Novelis. (iii) Three-fourths of cash flow from business likely to be invested in growth capex.

In our view, the capex trajectory focuses on enhancing returns at Novelis and the value-accretive downstream business in India. Furthermore, speedy debt reduction provides enough room to pursue such projects at no incremental balance sheet stress. We maintain ‘Buy’ with a TP of Rs 650 at 5.9x FY23e Ebitda.

Capex thrust a big positive
We find Hindalco’s capex plan through FY27e strengthening its competitive position in chosen markets while concentrating on the high returns segment in India. Key points: (i) The company is assessing setting up the first greenfield mill in the US in past 20 years. (ii) Focusing on the attractive beverage can and automotive markets in the US. (iii) Brownfield Al smelter expansion limited to 180ktpa. (iv) Enhanced focus on alumina market—both metallurgical and speciality grade. In our view, the consolidated net debt/Ebitda at 1.62x implies enough room to pursue growth. We expect annual Ebitda of Rs 300 bn-plus ($4 bn) through FY24E.

Sharpened focus on ESG
Beyond the company’s long-term (FY50) targets of net carbon neutrality, water positivity and zero waste to landfill, we are positive on near-term milestones. Key points:
(i) Recycling content at Novelis to increase to 67% (FY20: 59%).
(ii) 30% carbon reduction at Novelis (from 2016 baseline) with identified decarbonisation strategies. (iii) FY25E renewable energy target of 200MW at Indian operations. (iv) Zero landfill at Mouda, Taloja and Belur by FY23e. Despite the company relying on coal-based power for its upstream aluminium business in India, we remain positive in light of its initiatives to reduce its overall carbon footprint.

Outlook: Prudent capex plans
We believe Hindalco’s medium-term capex strategy addresses key investor queries on the next leg of growth. While the capex addresses all the markets and segments, we find concentration in the US (65% of total Novelis spend) and alumina in India (32% of India spend) focusing on the right areas. Given the company’s significant balance sheet room and Ebitda generation potential, we do not see incremental stress on the balance sheet.

In terms of capital allocation, we find Hindalco hitting the right areas by targeting 75% of cash generation on growth projects. We will keep close tabs on the progress made in announced projects as well as the ones under appraisal. We maintain ‘BUY/SO.

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Author: Howard Caldwell