Hindalco: Building a Robust Future Through Strategic Expansion
Hindalco, a prominent player in the aluminum industry, has set forth ambitious plans for growth, investing USD 4.4 billion over the next five years in various projects. These ventures encompass the expansion of FRP capacity in the USA, upstream expansion at Utkal, capacities in the special alumina business, and downstream aluminum capacities, among others. Notably, a significant portion of this investment, approximately USD 3 billion, is allocated to the USA region.
Strategic Expansion and High-Value Products:
Hindalco’s strategic approach involves expanding its downstream capacities significantly, marking the right move to capitalize on robust growth opportunities. Despite near-term challenges due to a slowdown in China and its impact on non-ferrous prices, the company’s long-term outlook remains positive.
Key Highlights and Investment Thesis:
Here’s why investors should take note of Hindalco:
Strong Order Book and Revenue Growth:
- PNC Infratech boasts a robust order book, providing substantial revenue visibility. As of Q1FY24, its order book, including recently awarded projects (four Hybrid Annuity Model (HAM) and one Engineering, Procurement, and Construction (EPC) road project valued at ₹4,083 crore), stood at approximately ₹18,900 crore. This represents a substantial 2.6 times the book-to-trailing twelve months (TTM) revenues.
- The company has projected inflows of around ₹10,000 crore during FY24E, primarily driven by road projects (over 70%), with the rest expected to come from non-road segments such as water and railway. This strong order book visibility is expected to lead to a healthy revenue CAGR of approximately 13.5% from FY23 to FY25E, reaching ₹9,097 crore.
Robust Funding for HAM Projects:
- PNC is well-positioned to fund its HAM projects. As of Q1FY24, the company had infused ₹1,712 crore into its HAM projects, with a remaining equity requirement of ₹1,228 crore to be injected over the next three to four years. The company anticipates funding this equity from its robust internal accruals.
- PNC’s balance sheet remains strong, boasting a net debt-to-equity ratio of 0.17x as of Q1FY24, further enhancing its financial stability.
Asset Monetization Strategy:
- PNC is actively exploring asset monetization opportunities. The company is in discussions with potential investors to monetize eleven HAM and one BOT project (Bareilly Almora), collectively holding debt of approximately ₹6,900 crore and equity of around ₹1,700 crore (seven operational; the rest likely to become operational in the next three to four months).
- Non-binding offers have been received from interested parties, and management expects the monetization process, including the receipt of funds, to conclude by the end of FY24. This strategic move will significantly enhance the company’s scalability.
Rating and Target Price:
Given PNC Infratech’s consistent execution and stable margin trajectory, the company is well-positioned for growth. The medium-term catalyst of asset monetization is expected to unlock capital and drive scalability.
- Motilal Oswal assigns a BUY rating to PNC Infratech.
- Our target price for PNC is ₹460 per share, valuing its construction business at ₹373 per share (at 12x FY25 EPS) and HAM at 1x equity invested.
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