Hindalco on the mend, to focus on value addition

21 September 2016

Megha Mandavia and Baiju Kalesh

Aluminium major to also push to reduce leverage ratio by selling non-core assets

Mumbai: Hindalco Industries is finally seeing the tide turn as the company showed free cash flow for the first time in several years after a heavy capital expenditure to more than double its capacity amidst a global commodity downturn. The aluminium major, owned by Kumar Mangalam Birla, will now focus on reducing its leverage ratio by selling non-core assets and improving its operating profit under its new CEO Satish Pai who joined from Schlumberger.

“Commodity has not been a great word for the past 2-3 years. Novelis, like Hindalco, had gone through a rough patch,” Pai told ET, in his first interview after taking over in May 2016 from Debu Bhattacharya under whom the company bought American aluminium can maker Novelis and more than doubled its capacity at home. “The first stated objective of this management team is to reduce debt to operating profit, or EBITDA, and deleverage the balance sheet before taking up any big project.”

Hindalco’s subsidiary Novelis refinanced Rs.16,753 crore of debt in two tranches in August and September, helping it save Rs.362 crore in interest every year. Blackrock, Fidelity, Allianz Bernstein were some of the investors. Hindalco also prepaid Rs.1,300 crore of its standalone loan of Rs.28,766.33 crore while extending the repayment timeline to 2032. Hindalco is now planning to sell its alumina refinery and bauxite mines in Brazil in an effort to trim its massive consolidated debt of Rs.67,517.67 crore as on March 31, 2016.

“Stable aluminium prices after the recent rally augurs well for Hindalco, given its improving profitability. This, coupled with a full ramp-up of its operations, significantly improves its cash-flow profile,” brokerage Phillip Capital wrote in a report released on September 12. “With no major capex planned for the next couple of years, Hindalco is likely to see a sharp decline in its net debt,” it said. Hindalco shares have largely recouped their losses as the world finds its feet after a nightmarish commodity downturn. On Tuesday, Hindalco shares rose 1% before closing at Rs.145.35 on BSE. “What is our story for the next five years? Our stated goal is to take our value-added products to 30% of our total sales to at least 50-60% over the next five years. It is less capital intensive and reduces the impact of fluctuation from the London Metal Exchange,” said Pai.

Pai is focusing on selling value-added products to segments such as electrical, building and construction, consumer packaging and transportation. “We are taking into account our capex constraints and evaluating all these market sectors to see which ones we will go for over five years. We are putting in small investments to grow there,” said Pai, who is planning a capex of less than Rs.1,000 crore every year.

Hindalco reported a standalone profit of Rs.294 crore for the first quarter compared with Rs.61.39 crore in the corresponding period. Novelis reported an income of $24 million for the same quarter compared with a loss of $60 million in the year ago period.

The improvement, analysts say, is on the back of lower input costs and higher volumes. Coal costs are expected to go down further. Pai’s next big focus is to reduce the logistics cost by increasing transportation through railways as an upside to improving profitability remains limited with constant interest costs and stable volumes. Interest cost is still eating up half of standalone Hindalco’s EBITDA.

“My next big plan is to make a difference to logistics. Today logistics costs 15% of aluminium price. I think I can get it down to 8%,” said Pai. “I can’t do much about the aluminium prices on the London Metals Exchange.” Hindalco’s cost of production stood at $1580 per tonne in the last financial year, down 17% from a year-ago, according to Kotak Securities calculations. The company does not disclose cost of production to stock exchanges.