Hindalco will participate in India’s first commercial auction of coal: Satish Pai, MD
It was a record quarter for NOVELIS and their EBITDA per ton stood at $470 and total EBITDA was $383 million, which are all-time records for them. COVID-19 didn’t have any major impact on their operations and shipments in this quarter. However, it had some impact on their shipment, which was a bit less in March.
Satish Pai, Managing Director, Hindalco Industries, talks about March quarter results, the way COVID will impact Hindalco’s performance in Q1FY21, metal prices, Aleris acquisition and reforms introduced in metal and mineral space during a candid chat with Swati Khandelwal, Zee Business. Edited Excerpts:
Q: March quarter results are way better than what the street estimates. What are the important highlights and how did you manage to achieve EBITDA growth in such a challenging environment?
A: It was a record quarter for NOVELIS and their EBITDA per ton stood at $470 and total EBITDA was $383 million, which are all-time records for them. COVID-19 didn’t have any major impact on their operations and shipments in this quarter. However, it had some impact on their shipment, which was a bit less in March. But fundamentally, there was a demand for can body stock and auto was quite strong and this turned this quarter into a record quarter.
Secondly, if you have a look at the Aluminum business in India then it stands at Rs 1,038, which is 3% up from Q4FY19 numbers. LME was down this time, but it was supported by the low cost of production and that’s why EBITDA per ton in Indian aluminium business was quite strong. The cost of production was low due to a reduction in the prices of coal, CP Coke, caustic and furnace oil. All of these are our input costs for us. This reduction their prices have brought down our cost of production allowing aluminium EBITDA to outperform. If you have a look at the copper then its profit stands at Rs 400 crore and it managed to beat the street estimates. There was a one-time derivative accounting gain of Rs 100 crore in it. Thus, the underline profit in copper comes to Rs 300 crore. So, the EBIDTA of all three, NOVELIS, aluminium and copper, has managed to beat the street estimates.
Q: In the investor presentation you have stated that most of the plants were running at full capacity during the lockdown. So, can we expect that there will no COVID-impact on your business in Q1FY21?
A: COVID will have an impact because our copper plants were shut down; smelters were closed in Gujarat for one and a half month. But, it will have the least impact on aluminium as all the smelters and refineries of aluminium were running on full capacity.
Q: Metal prices have been under pressure since the start of the trade war in 2018, and now global pandemic has impacted growth and consumption. What is your outlook on metal performance amid these concerns and how will you manage your margins?
A: Cost of production is essential in maintaining the margins. So, if there is a decline in LME than the cost of production should be brought in-line to it. Coal cost is most important for us in India because 40% cost of production depends on coal. So, look at the steps taken by the ministry of coal in relation to commercial mining and availability of coal and if the prices of coal remain under control in India than it will benefit the metal companies because it will help them in maintaining their EBITDA.
Q: Let’s talk about Aleris acquisition, where you have received the necessary approvals till April. What is an update on Lewisport and Duffel divestments is it on track and can you please tell us about its timelines?
A: All the integrations were consolidated with approvals and the integration process has been started now. The sales of Duffel have announced earlier that Liberty House is the buyer, currently, it is waiting for approval from China and it is likely to be approved by July. When it comes to the divestment of Lewisport then a time till the end of the year is provided to us for that purpose as DoJ (Department of Justice) knows that it will be hard to sale it under prevalent conditions. So, we will have to wait till December 2020 to sale Lewisport.
Q: What is the update on Utkal Alumina expansion plans?
A: We had a 500-kilotonne (KT) expansion plan and it was scheduled to be completed by December but we were not able to run the project due to COVID-19, although the plant was running. So, we may face a loss of 2 months but the project will be completed till March 2021.
Q: The government in the recent past has introduced a lot of reforms in metals and mining space. Do you think that the joint auction of minerals will help in achieving a better operational efficiency?
A: You will get a cost comfort and stability because bauxite and coal has a 60% contribution in the production of aluminium. It is better for bringing fresh investments. The government has taken this step because there was a need to increase the current capacity from 4 million tonnes within five years otherwise India would have turned into a big importer of aluminium. The government wants to increase the domestic capacity and the step was taken by the government for the purpose is very good.
Q: India's first commercial coal auction will be held on June 18, 2020, will you bid for coal blocks? How Gung ho you are?
A: Very Gung ho and we will certainly participate. We will applaud the government for taking the step as it is a bold step but is a very necessary step.
Q: The government is talking about the creation of an Atmanirbhar Bharat (Self-Reliant India) and the commerce ministry is looking at various options to encourage the domestic players and boost their consumption and manufacture. So what is it that you would like to have, what is your requirement and expectations from the government including duty structure in metal space?
A: A tariff or measure called Remission of Duties or Taxes on Export Products (RoDTEP) is very important. The commerce ministry has said that anything imported into India, the duties charged on Indian companies on import should be charged at the level, like coal cess and electricity duty. This is a very important step that the commerce ministry is taking called RoDTEP. It is the most important thing for us.
Q: Do you have any further expectations especially for Alumina like changes in duty?
A: Input cost, for instance, those involved in the import of alumina doesn’t want an inverted duty structure on it. The duty levels on RPC (refine petroleum coke), copper concentrate and alumina are very high and we are asking the government to reduce it with an aim to reduce our input cost.
Q: Value-added products and non-LME have helped you in increasing the growth and the margins. So, talk about the contribution of the non-LME products and plan to scale up it?
A: Our EBITDA stands at Rs 4,173 crore of which 86% contribution came from NOVELIS, which is non-LME linked and Rs 400, which is non-LME linked. So, only about 20%-25% of the Indian aluminium business is linked to LME. So, we have a long-term plan to increase the non-LME linked downstream value-added business.
Q: Overall what investment has been planned for expansion and CapEx for this year and how will you gear up for the next year and do you have funds for the purpose or will have to look ahead to raise funds?
A: There will be no need for fundraising funds because in March itself Hindalco in created a liquidity reserve of Rs 9,900 crore and Novelis also created a liquidity reserve of around $2.6 billion. So we planned for the crisis in advance and that’s why there is no need to raise funds. Secondly, both of us, Hindalco and Novelis, have reduced its CapEx by 30%-40%. Our CapEx will concentrate only on the ongoing projects and maintenance or else, we will preserve the cash. We will move on the growth model once after the crisis comes to an end.
Q: Are you looking forward at any M&A opportunities?
A: From the acquisition of Aleris, we have learnt that Novelis is so big that any further acquisition will be very difficult for us. So, after this acquisition of Aleris, we have decided to focus on organic growth. In the case of India, there is no other company that can be targeted for acquisition purposes. So, I think it will be fair to say that going forward we will focus on organic growth.
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Q: How do you foresee the demand and pricing scenario in future and what is the outlook with which you are working?
A: Pricing depends on demand. So the most important aspect at present is how the economic growth and demand will pick up post-COVID crisis. For instance, demand has bounced back very sharply and quickly in China. Now, we all are looking at America because they have relaxed lockdown and are looking at reviving the economy. So, it will depend on the kind of recovery that happens in India, America and Europe, i.e. U-shaped or V-shaped. I hope not L-shaped. So as long as it bounces back in a quarter or two, we should be ok.
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