Hindalco stock down 5% post $8 billion Capex announcement

Hindalco had an analysts' meeting yesterday and announced its future business plans and growth strategies. Brokerages have upgraded the rating to the company post meeting. Let us look at all the major developments.

About Hindalco

• Hindalco is the metal flagship company of Aditya Birla Group, and it is an industry leader in copper and aluminium.
• Hindalco acquired Aleris Corporation in April 2020 through its subsidiary Novelis Inc. It cemented the company's position as the world’s largest flat-rolled products player and recycler of aluminium.
• Hindalco ranks among the global aluminium majors as an integrated producer and has a footprint in 9 countries outside India.

Update from Analysts' meet

• Hindalco unveiled an ambitious $8 billion CAPEX for the next 5 years of which 60% i.e. US$4.5 to 4.8bn would be spent at Novelis across fresh hot mills, recycling and finishing capacities across North America (US$3bn), South America (US$0.4bn), Asia (US$0.4bn) followed by Europe (US$0.3-0.4bn).
• Rest 40% i.e. US$3.4bn would be spent in India across Aluminium upstream (US$1.71bn), downstream (US$719mn), Copper (US$286mn), specialty Alumina (US$194mn) and development of recently won coal mines (US$459mn). 
• Novelis has also increased its CAPEX target from a $1 billion CAPEX target announced last year to $ 4.5-4.8 billion over FY 23-27.
• In terms of capital allocation about 75% of free cash flow post regular working capital and maintenance capex each year would be spent on the capex program, while 15% would be earmarked to meet the scheduled high cost debt repayments and about 8-10% would be returned to shareholders.

Brokerage radar:

Of the 27 analysts tracking the company, 25 recommend a ‘buy’ and one each suggests a ‘hold’ and a ‘sell’, according to Bloomberg data.

JPMorgan

JPMorgan downgrades to ‘neutral’, but raises target price to Rs 665 apiece from Rs 605. As per the brokerage firm, the company’s downstream exposure could be a drag if LME prices remain more than $3,500 a tonne. Substantial capex across India upstream, coal and Novelis as balance sheet repair done. Key downside risk is margin contraction at Novelis. The firm increased FY23-24 EPS by 20-21%, respectively. 

Jefferies

Jefferies has a ‘Buy’ call on Hindalco with a target price of Rs 700. It says, the plan for greenfield expansion at Novelis looks aggressive for current margin profile. The company is embarking on a growth phase with plans to spend $8 billion in the next 5 years. It appreciates the rising growth focus as the company reduces 30% of debt in 1.5 years.

CLSA

CLSA downgrades to ‘outperform’ from ‘buy’ and cuts target price to Rs 695 from Rs 710. Headwinds for Novelis could impact Q4 earnings and are likely to be offset by higher scrap spreads. It continues to see Hindalco as well placed to benefit from the upcycle. Risk-reward less compelling following its recent rally.

Motilal Oswal

The brokerage firm has recommended buy rating on the stock with a target price of Rs 750. The management sees strong demand for aluminium from major segments like Beverage Can, Automotive Body Sheet, Specialties, and Aerospace. The supply disruption in aluminium will deepen the deficit and result in higher LME prices through FY23 and FY24. They raised FY22/FY23 EBITDA estimate by 2.4%/6.6%, led by a 0.6%/10% increase in LME aluminium prices.

Hindalco shares fell more than 4% to end at Rs 471.3 on Thursday.