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Embarking on prudent growth capital allocation and with an eye on sustainability

Hindalco highlighted potential spend of US$4.58bn in Novelis and US$3.43bn in India operations over FY23-27E. Management expects ~US$2bn of FCF post sustaining capex and has created a roadmap to allocate 75% of the same toward growth projects. 15% will be allocated toward deleveraging and 8-10% toward shareholder returns. In Novelis, incremental capex of US$3.5-3.8bn will take capacity up by 1.3mtpa. We would have ideally liked to see an upping of the EBITDA/te guidance as well. In the absence of the same, the return potential for incremental investment appears to be a notch below what has been achieved in the previous Novelis expansions (FY11 + FY19). Management followed through on its previous prompt of looking at brownfield smelter expansion (0.185mtpa) in India at a capital cost of US$3,750/te – the project is still at the appraisal stage; with renewable power sourcing. Management continues to stay focussed on improving the downstream mix as domestic aluminium capacity reaches 1.5mtpa. We maintain BUY.

US$4.58bn of capex in Novelis to take up volume by 1.3mtpa (to 5.8mtpa). This also entails additional scrap recycling capacity of 1mtpa. Novelis is planning a fully integrated rolling and recycling plant in the US of 0.6mtpa (Can + Auto) for a total capex of US$2.5bn. The expected commissioning is by FY26E. While capex intensity is high because of first hot mill to be commissioned in the US in over two decades, there was no commensurate upping of the EBITDA guidance. While management continues to see an 11% CAGR in global auto FRP demand, its optimism on can demand appeared a notch higher. Not only were multiple references of US$4.5bn of investment (in US) undertaken by can customers, the presentation also highlights a growing demand supply gap for the next 7-8 years in North America for beverage cans (from 300kte in CY22 to more than 500kte in CY30) – and management was categorical that the extent of supply shortfall is not that extreme for autos at present. Novelis has also announced 0.4mtpa of rolling and recycling capacity for can in Brazil at a capex of US$0.8-1bn (completion expected in FY27).

Cost and supply chain impact of US$70-75mn. While market conditions are favourable, Novelis management highlighted i) inflation and ii) supply chain disruption. While there was energy inflation in the past quarters, management was able to manage the same with recycling benefits. In the current quarter, because of sharp escalation in energy costs, there has been an impact of US$40mn (additional). Supply chain disruption, ability to source material in time has been a headwind lead to additional impact of US$30-35mn in the current quarter. Because of a sharp increase in metal prices, there will be an EBITDA tailwind (65% of scrap sourcing), but there was no guidance for the same in the meet.

Smelter brownfield expansion with renewable energy under appraisal in India; focus on downstream continues. If Hindalco can manage 1mtpa greenfield alumina capacity at US$800mn, it will be at lower intensity than what was finally achieved with Utkal ~7-8 years back. The brownfield cost is also significantly lower at US$3,700/te (still not competitive with US$2,000-2,500/te of Chinese capex costs seen in the last round of expansion in NW China). Hindalco has also announced ~US$459mn of capex for increasing captive coal production from Chakla and Meenakshi mine to 14-16mtpa. Biggest downstream expansion comes in the form of 170kte casting and cold rolling expansion at the Aditya plant with planned capex of US$400mn. Given the current mix of capital projects, we foresee a gradual improvement in return ratios for the domestic operations.

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