Economic slowdown and weak demand in North America and Europe, coupled with an energy crisis have hit Novelis’ near-term outlook, prompting Hindalco Industries to slash its five-year capex plan by 43 per cent.
In an interaction with analysts on Tuesday, the Hindalco management announced a reduction in its five-year capex to $4.5 billion from $7.9 billion earlier. Growth projects have been deferred but not cancelled, the management assured analysts.
Anxious to conserve cash flows, the Hindalco management also indicated that it would not be using operating cash flows to deleverage, compared to its earlier plan to use 15 per cent of the cash flows for that purpose, while 8-10 per cent will still be allocated towards shareholder returns.
A year ago, the company had planned to spend the amount during FY23 to FY27, and now the much-reduced amount will be spent during FY24 to FY28.
The main focus of its expenditure, to the tune of $3.3 billion, will be for Novelis’ greenfield rolling capacity in the US, and debottlenecking and recycling units across geographies. Projects worth $1.6 billion that have been deferred include rolling capacities in Brazil, Europe and a downstream capacity in China.
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The remainder of the capex will be in India, where downstream aluminum capacities will go ahead as planned, while upstream capacities will be deferred.
Shift in patterns
Novelis is facing de-stocking and demand weakness in the can segment as consumption patterns have shifted post the pandemic. Inflationary pressure from a rise in raw material prices and an energy crisis in Europe are biting into Novelis’ margins, while there are challenges in the specialty end-market demand in North America and Europe, due to higher interest rates and weak economic growth.
The headwinds are likely to persist through this year, affecting Novelis’ profitability margins, and are expected to normalise only towards the end of the year. However, the management was firm on Novelis’ commitment to achieve an EBITDA per tonne of $525 by the fourth quarter of this fiscal, compared to the low of $376 seen in Q3 FY23.
In order to offset the headwinds, Novelis has been taking cost mitigation measures such as working capital management, staggering out expenditure and hedging judiciously. It is also focused on its ESG initiatives, where the company is estimated to have already achieved well over half its estimated target for 2050.