Hindalco Lays Out Plan To Cut Debt, Alters Dividend Policy

Hindalco Industries Ltd. outlined its plan to cut and refinance debt and has also changed its dividend policy.

The company targets to lower its debt by end of 2022 to bring down its leverage from a peak of 3.8 times to 2.5 times, according to its investor presentation. Its subsidiary Novelis Inc. will repay and refinance debt worth $2.6 billion, while the parent targets to cut its burden by $0.3 billion.

The plan is in line with what Satish Pai, managing director at Hindalco, discussed in an earnings interview with BloombergQuint.

Debt Reduction

• Novelis will pay off a $1.1 billion bridge loan by March 2021. It has already repaid its short-term debt of $900 million by the second and third quarter of FY21.
• Of a $1.7-billion term loan due in 2022, $1.1 billion worth of debt will be refinanced and the rest will be repaid via cash flows.
• Hindalco intends to pare its debt by $0.3 billion by refinancing $540 million and repaying the balance $270 million worth of rupee bonds due in 2022.

Capital Allocation

The aluminium producer expects to generate $1 billion to $1.2 billion in cash flow a year after normal working capital and maintenance capex. It targets to allocate $2.5 billion to $3 billion towards growth capex in the next five years.

Dividend Policy

Hindalco also outlined a new dividend policy to pay 8-10% of the consolidated free cash flow to shareholders—after meeting its interest, tax, statutory dues, sustenance capex, working capital, but before considering strategic investment (growth capex) and debt repayment/prepayment.

That changes from its earlier policy of intending to pay 10-30% of the standalone net profit, net of dividend of preferential shareholders.

The dividend will be declared out of the profits of that financial year or previous fiscals after providing for past depreciation. The current policy provides for paying dividend out of the existing year’s standalone net profit and the retained earnings were to be used only in exceptional circumstances.

Hindalco’s New Capital Allocation Framework

According to the presentation, here's the broad allocation of cash flow after normal working capital and maintenance capex:

• Growth Capex: 50%
• Debt Reduction: 30%
• Shareholder Returns: 8-10%
• Balance to be retained in treasury

This is a major step taken by the company to reward shareholders as Novelis continues to throw record operating cash flow, Emkay Global said in a note. The brokerage expects strong free cash flow from FY22 onwards and at 8%, dividend per share could more than double from existing Rs 1-1.2 apiece to up to Rs 4 per share.

Analyst View:

Jefferies

• Maintains ‘buy’; raises target price to Rs 390 apiece from Rs 350.
• Expects deleveraging at relatively slower pace than earlier anticipated.
• Factors higher capex with plans to spend $5.3-5.8 billion on growth and maintenance in the next five years.
• Higher capex and increased dividend payout reduces the extent of deleveraging in FY22-23.
• Continues to like Hindalco given 23% Ebitda and 73% EPS growth in FY22.
• Raises FY22-23 EPS estimates by 5% on higher aluminum price assumptions.

Motilal Oswal

• Reiterates ‘buy’; target price at Rs 390 apiece.
• Reiterates Hindalco as top non-ferrous pick owing to 26% EPS CAGR over FY21-23E.
• Valuation is also reasonable at 4.9x FY23 EV/Ebitda and 7.7x P/E.
• Values it at Rs 390 per share on FY23 EV/Ebitda — 5x for India and 6x for Novelis.
• Its 5.9x FY22 EV/Ebitda and 1.0x FY22 P/B are reasonable.

JPMorgan

• Maintains ‘overweight’ rating; target price at Rs 350 a share.
• Welcomes capital allocation policy that aims to distribute OCF towards growth capex.
• Expects some consolidation given sharp outperformance.

CLSA

• Maintains ‘buy’, target price at Rs 380 apiece.
• Addressing capital allocation concerns.
• Raises FY22-23 PAT estimates 9% and 24% on higher LME and lower interest cost.
• Announcements to drive further rerating as it provides growth visibility and focus on ESG.