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 similar to the one laid out by Satish Pai, managing director at Hindalco, in an 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 Rs4 per share.

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