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Capacity expansion and shift to high value-added downstream products to drive profitability

* Hindalco (HNDL) plans to incur a capex of USD4.4b over the next five years for several projects, including FRP capacity expansion in USA, upstream expansion at Utkal, special alumina business capacities and downstream aluminum capacities, among others.

* Over USD3b of capex is allocated to the USA region. About 80% of the organic growth capex in India (USD1.1b) will be allocated to the downstream business.

* HNDL expects Novelis’s EBITDA/t to touch USD525 by 4QFY24.

* We believe HNDL is adding downstream capacities at the right time to capture the robust growth opportunities. Despite near-term headwinds due to a slowdown in China and its impact on non-ferrous prices, the long-term outlook remains positive.

* We reiterate our BUY rating on the stock with our SOTP-based TP of INR550. 

EBITDA guidance for Novelis kept unchanged at USD525/t

* As headwinds from channel destocking of beverage cans are over, HNDL expects EBITDA/t to touch USD525 by 4QFY24 for Novelis.

* For Novelis, we assume EBITDA/t at USD476/t for FY24E and USD506/t for FY25E. 

Coal linkages to drive cost synergies

* HNDL’s total coal requirement is around 16mt, which is currently fulfilled either by its own mines, linkages (~41%), e-auctions (~53%) or imports.

* Chakla mine, which has PRC of around 4.5mt, is progressing as per timelines. The box cut is expected to come on stream by Oct’24 and the mine is expected to be fully operational in FY26E.

*Once operational, it will reduce the company’s dependency on procurement of coal from external sources.

* HNDL has also been declared as a preferred bidder for Meenakshi West mine at a ~33% premium, which has PRC of 6-7mt.

HNDL on track to enhance its capacities

* HNDL has undertaken a capex program of USD4.4b spread over five years. ? Out of the total capex, USD3.3b is allocated for growth projects for Novelis and USD1.1b for Indian operations.

Novelis:

* USD2.7-2.8b would be invested toward setting up a 600kt low-carbon recycling and rolling facility at Bay Minette, USA.

* Bay Minette facility, which will cater to North America’s beverage can sheet requirements, is expected to commence production in FY26.

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