Cashflow concerns may keep Hindalco under pressure

The hike in capex projections at Novelis and the fire at one of its plants have impacted its parent Hindalco’s stock price adversely.

- DEVANGSHU DATTA

Novelis (a 100 per cent subsidiary of Hindalco) has revised the Bay Minette, Alabama project cost to $5 billion from earlier guidance of $4.1 billion and initial estimate of $2.5 billion.

This implies around 7.3 per cent post-tax return on capital employed or RoCE, apart from risks of more overruns and concerns about execution. Earnings and free cash flow in the next few quarters may also be under pressure due to the fire incident and tariff-related fears. The net debt stands at $5.8 billion in Q2FY26, up from $5.2 billion quarter-on-quarter (Q-o-Q).

Novelis’ Q2FY26 adjusted operating profit of $422 million (operating profit $448 per tonne) was impacted by the Oswego fire accident. The total impact of the fire is estimated at $550-650 million ($100-150 million on operating profit with the rest written off as exceptional items). The entire cashflow impact will be visible in H2FY26 though management is guiding for 70-80 per cent loss recovery in insurance. The upwards revision of Bay Minette capex implies an internal rate of return (IRR) drop and debt to increase and debt to operating profit ratio at 4.0 times. Add in trade war uncertainty, and analysts are downgrading since FY26 will be a disappointing fiscal.