Hindalco recalibrates capex to $4.5 bn from $8 bn, cites challenges

Hindalco Industries, the aluminium company that is part of the Aditya Birla Group, has recalibrated its growth capital expenditure to $4.5 billion to be spent in the next five years from $8 billion announced a year ago. This likely marks the first such decision by a major Indian firm in foreign capex.

Addressing an investors’ conference on Tuesday, Hindalco’s management said margin headwinds at Novelis, its US subsidiary, were transient and growth projects had been deferred but not cancelled. “We see the cut in growth capex as a sign of low confidence on operating cash flows,” a Kotak Institutional Securities report said.

Hindalco said it would spend $3.3 billion in the next five years on Novelis, focusing on greenfield rolling capacity, removing bottlenecks and setting up recycling units. The investments will depend on cash flows rather than taking any fresh debt, company officials said.

The bulk of the overseas capex will be spent on a $2.5 billion greenfield mill in the US, which is currently under execution. Hindalco has also decided to delay its cold mill and cold looped recycling investment in China as it wants to wait for demand recovery there.

Novelis has deferred $1.6 billion worth of projects that include rolling capacity in Brazil, Europe, and downstream capacity in China.

In India, Hindalco remains focused on downstream aluminium capacities with an investment plan of $2.32 billion, the firm said. Projects under execution are worth $1.13 billion, while some upstream capacity has been deferred for the time being.

Hindalco officials told investors that near-term market headwinds would continue to weigh on Novelis’ margins and it expects normalisation only by the end of the financial year 2023-24 (FY24). A Macquarie report said the Hindalco management reiterated Novelis’ target of delivering $400 million of free cash flow in FY23 and highlighted that future capex (after spending $4.5 billion) will be calibrated to match cash flows and will not be funded by debt.

In the US, the company plans to destock in the aluminium can segment due to demand weakness linked to changes in consumption patterns after the pandemic. The sales of canned beverages in the US have slowed after consumers limited the consumption of such beverages at home due to lockdowns.

The company highlighted the rising prices of various cost items, including energy in Europe, which was likely to continue in 2023, whereas costs were being passed through in contracts with a lag. It also pointed to challenges in specialty end-market demand due to higher interest rates and weak economic growth in North America and Europe.

Hindalco’s stock closed flat at Rs 403.35 apiece on the BSE on Wednesday.

India Inc is a large investor in foreign geographies with the Tatas investing in steel and automobiles, Adani investing in mining and port projects, and Bharti Airtel investing in telecom projects. As a result of rising interest rates in the United States, several companies have cut jobs and investments.