InvestorQ : What is it that other companies can learn from Hindalco’s capital allocation framework?
Arti Chavan made post

What is it that other companies can learn from Hindalco’s capital allocation framework?

Rutuja Nigam answered.
2 months ago

There is a lot that other companies can also glean from what Hindalco has done with respect to the capital allocation framework. That is because, the framework that Hindalco has zeroed in on is value accretive. It gives tremendous clarity to shareholders of any company of how the net cash generated by the company will be allocated and distributed in the most productive way.

There is one more reason why this model is applicable and relevant to all companies. For example, valuation models gives a higher weightage to reinvestment of cash in the business and a lower weightage to dividends as the former is value accretive. In the case of Hindalco, the template is clear that the biggest chunk of cash flows will go into capital expenditure followed by debt reduction and a much smaller chunk will go into dividends.

Most Indian companies must start thinking in terms of a capital allocation framework, which is already quite popular for a long time in Western markets. Indian companies have intuitive capital allocation frameworks but the takeaway from what Hindalco has done is likely to become the template for India Inc. Increasingly, companies will use this is as a means to effectively communicate with their shareholders and potential investors.

Indian companies need to urgently and effectively communicate to shareholders how free cash flows will be utilized. Take the case of RIL. Between 2010 and 2015, there was no clarity on how the cash will be used and the stock virtually stagnated. It was only when the telecom story came out in 2016 that the re-rating started. It is clear what investors are looking for. Give them clarity that their funds will be deployed productively and profitably.