Hindalco Industries, in its investor meeting on April 04, slashed its capital expenditure plan by 43 per cent for the next four years from $7.9 billion to $4.5 billion. Hindalco cited destocking, rising energy prices and high interest rates as reasons for a conservative capex plan. But Hindalco is not alone. In the last six months, the spread between realisations and costs, has been shrinking and so are the capex plans.
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Management commentaries of the most of the companies in recent quarters have focused on realisation pressures.
On one hand, prices of commodities have come down, but on the other hand, prices of coal and other raw materials have increased along with increased costs of logistics and transportation. Added to this, the interest rates in the Europe and the US are at an unprecedent levels.
As the impact of high rates trickle down, the fallout on major end users in automobile and construction industries is the primary headwind.
China, which is a major producer and consumer of metals, is also reporting its slowest growth rate in the recent years. The weakening demand in the international markets will impact prices and realisations of domestic companies.
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Nevertheless, removal of ban on exports, national infrastructure plan, and strong revival in auto and housing sectors can support the demand for metals.
The rally in metal stocks in the last two years—Nifty Metal grew 3.6x from Covid lows—is expected to soften in FY23/24 given the high base and lower realisations.
Others have trimmed too
JSW Steel was the first company to announce a reduction in capex plans in July 2022. Though the company retained its long-term goal of investing about ₹48,000 crore over the next three years, it trimmed the capex plan for FY23 from ₹20,000 crore to ₹15,000 crore.
Vedanta, too, announced its plan to slash capex by about $400 million to $1.6 billion last year. The company has recently released a fourth dividend from Hindustan Zinc and a fifth dividend from itself to aid its parent company’s deleveraging efforts.
Though Tata Steel and SAIL have announced major capex plans, the implementation has been slow. Tata Steel is expecting a support from the UK Government to complete its capex plans. SAIL also reported being behind on its capex plans.
It’s different this time
Though any reduction in capex may impact growth, the financial and operational leverage may not turn negative as it did in earlier metal cycle. The high capex plans supported by debt had adversely impacted the sector in the previous decade when the metal cycle entered a slowdown.
For instance, steel companies have deleveraged significantly. The range of net debt to EBIDTA came down from 4-6 times in March 31, 2020 (pre-Covid period) to 0.6-1.4 times in March 31, 2022 for the leading steel companies.