On February 13, Hindalco Industries Ltd faced a significant setback as its share price plummeted by 10% due to a downward revision in return guidance for its subsidiary, Novelis’ Bay Minette project. The revision came as Novelis announced a staggering 65% increase in the total capital cost along with a one-year delay, pushing the project’s cost estimate to $4.1 billion.
This adjustment is primarily attributed to escalated expenses for civil and structural requirements. Consequently, the expected returns have been downgraded from ‘mid-teens’ to ‘double digits,’ a shift noted by management.
Kotak brokerage raised concerns regarding Novelis’ ability to generate free cash flow (FCF) between FY2024-28 based on the revised capital expenditure (capex) projections. Additionally, there’s apprehension about potential further cost inflation, as management expresses only 85% confidence in the current estimates.
As of 3QFY24, Novelis reported a net debt/EBITDA ratio of 2.7X, with Kotak estimating it to remain relatively stable between FY2024-28. This downward revision in return expectations underscores the challenges Novelis faces in executing its Bay Minette project and highlights the potential impact on Hindalco’s financial performance.
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