Hindalco rolls up the value chain

Aluminium-to-copper producer Hindalco could make 1.3 million tonnes (mt) of the silvery white metal and 2.9 mt of smelter feedstock alumina during 2016-17 as its two greenfield smelters, each with a capacity of 360,000 tonnes in Odisha and Madhya Pradesh, and the 1.5 mt refinery in Odisha operated for the first time at rated capacity. Thus, Hindalco was able to execute three big projects — the alumina refinery also involved opening a bauxite mine at Baphlimali with proven resources of 200 mt — simultaneously when the country had many instances of NGOs turning hostile to moves to build new aluminium capacity. Whether Vedanta or Nalco or Hindalco, none was spared protests, occasionally violent, in their attempts to open mines or build smelters and refineries. 

In the process of achieving the ideal size of primary aluminium volume backed by adequate refinery, power and bauxite extraction capacity, Hindalco had to resort to sizeable borrowings. Now that all the three new units are running to capacity and they are counted among the more efficient plants in the world, the company has turned its focus on deleveraging the balance sheet to achieve a significant improvement in net debt to earnings before interest, tax, depreciation and amortisation (Ebitda). The focus in liquidating debts at rapid rates has found Hindalco’s net debt to Ebitda at 3.3 at 2017-18 first quarter-end from 6.7 at 2016-17 March-end. As things stand now, the ratio should be three by March 2018, showing net debts of about Rs 15,000 crore on the books.  

Hindalco’s move to proactively cut debts has no doubt been helped by aluminium emerging as among the best performing industrial metals in 2017. The three-month aluminium on London Metal Exchange (LME) rose from $1,577 a tonne in March 2016 to $1,693 in January 2017 and to $2,129 now. Financial services group JP Morgan and leading aluminium producer Rusal remain positive about white metal prices for the rest of the year. 

Further improvement in aluminium prices will be aided principally by Beijing forcing closure of unauthorised smelters in northern China to reduce air pollution ahead of the winter. Global aluminium demand is likely to rise by 5.9 per cent this year compared with 5 per cent in 2016 will also support prices at higher levels. If China delivers on its promise, then that should lead to “global market deficit widening to around one mt in 2017,” says Rusal. Hindalco’s recent presentation to investors shows it remains bullish about aluminium. 

At 2.45 mt, Vedanta has a much larger smelter capacity under its belt than Hindalco. But Hindalco remains the best performer in the 4.12 mt Indian aluminium industry on the strength of its making growing volumes of value-added products (VAPs). Last year, it raised production of VAPs by 14 per cent to 481,000 tonnes. Nalco and Balco, which is 51 per cent owned by Vedanta, have also some presence in VAPs and aluminium alloys. But these do not as yet figure prominently in their business plans. 

In contrast, the Hindalco story is one of adding value through a long chain from bauxite mining to refining of alumina to its smelting into metal and further in downstream to making a host of VAPs from slabs, billets and wire rods. Unlike other industry constituents here, Hindalco has to its credit in building successful brands such as Everlast under which roofing and cladding sheets are sold and Freshwrapp to market foil rolls for domestic use. Hindalco Managing Director Satish Pai’s observation that in “value added and downstream segments, the Indian market has remained under pressure from low-cost imports from China” should prompt the government to take redressal steps. 

Not to miss out on any segment of the value chain, the company made a smart move a few years ago to transfer machinery and equipment from a closed Novelis flat rolled product (FRP) plant in Wales in the UK to Hirakud in Odisha where its owns a 213,000-tonne smelter. The 135,000-tonne FRP plant, which combines Novelis technology and the advantage of sourcing metal from the next door smelter, is the country’s only producer of can body stock. Operation of the unit has led to curbing of India’s import of the material. 

Remember when Kumar Mangalam Birla was thinking of buying Novelis, which besides being the world’s largest recycler of used aluminium has nearly 15 per cent share of flat rolled aluminium products there were naysayers in his group itself. Hindalco paid $6 billion in February 2007 for the Novelis acquisition. Post acquisition has seen Novelis making “strategic product shifts” and investing heavily for development of “high tech recycling capabilities.” Use of recycled aluminium now has a share of over 55 per cent in the making of FRPs by Novelis. Bewitched by its presence in high margin markets helped by ownership of exclusive steelmaking technologies, Lakshmi Mittal didn’t hesitate to pay 40 per cent more than his original offer for Arcelor in 2006. Similarly, Birla was drawn to Novelis for its rich store of FRP technologies.  

Earlier this year, Pai said in the next five years the “capex disciplined” Hindalco would invest up to Rs 4,000 crore in expansion of downstream capacity as it would seek an additional Ebitda of $150-200 a tonne. But stories that are now swirling around relate to Hindalco being ready to spend up to $5 billion if it finds good downstream aluminium assets in developed markets. Two major names that are doing the rounds are Constellium of the Netherlands, with presence in aerospace, packaging and automotive products, and Aleris Corporation in the US, which makes aluminium products for application in a number of sectors.

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