InvestorQ : What is the reason for Hindalco to rally so sharply in the last few days?
Mary Joseph made post

What is the reason for Hindalco to rally so sharply in the last few days?

Arusha Ray answered.
2 months ago

While the results of Hindalco were impressive for the December 2020 quarter and global metals demand has been robust, the real reason for the recent rally was that Hindalco has finally come out with a detailed capital allocation plan. Globally, capital allocation plans are part of corporate strategy so that shareholders get a good idea of how the surpluses in the form of profits will be utilized in the future by the company and gives more predictability.

On 23 February, Hindalco rallied by over 4% after it laid out a complete capital allocation plan that will be the guiding principle for the future quarters. Hindalco also disclosed plans to deleverage its balance sheet and reduce debt substantively. This is something a lot of large cash-rich companies have been doing in the recent past as they are trying to improve their solvency metrics by reducing debt.

The rather elaborate capital allocation framework revealed by Hindalco lays out the future trajectory of Capex, debt reduction and shareholder returns in the next few quarters. Hindalco will allocate nearly $3 billion towards capex in the next five years. However, the company has not revealed any major inorganic plans for the near future.

More than anything, it is the clarity on policy trajectory that was more important. For example, Hindalco has clearly targeted that it will generate $1.2 billion cash flow annually after regular working capital and maintenance capex. But more important is the clarity on distribution of these profits at a policy level. Hindalco will allocate 50% of cash flows for capex, 30% for debt reduction and 10% for shareholder returns in the future. That sets the tone.