Hindalco to plan new projects strictly in line with cash flows, won't borrow: MD Satish Pai

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26 Aug, 2025 12:21

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Hindalco expects to calibrate its capital expenditure needs according to its cash flows, as it doesn’t intend to borrow for expansion. While the company remains committed towards implementing ongoing projects, it would plan new projects in line with free cash flows (FCF), said the company’s Managing Director, Satish Pai, in a post-earnings interview with Moneycontrol.

This comes right after Hindalco lowered the capex outlook for Novelis (Hindalco’s US-based subsidiary) for the financial year 2022-23 to between $900 million to $1 billion, from the previously guided $1.3-1.6 billion. This was done in order to pace the capex.

The company expects better performance from its downstream copper and aluminium business in the second half of the financial year, and lower cost of production in its upstream aluminium business, added Pai.

Following are edited excerpts from the interview.

Do you feel upbeat about the outlook for the second half of the financial year for the upstream and downstream aluminium business, and the copper business?

The copper business has had two great quarters and we see that trend continuing in Q3 and Q4. The Indian downstream aluminium business has also done very well, and we see that trend getting stronger in Q3 and Q4.

The upstream aluminium business is where cost pressures are visible. But we think that coal availability and coal pricing peaked in the second quarter. Pricing should start to moderate in Q3 and Q4. So we expect upstream margins to improve in the second half of the financial year i.e. 2023.

What’s your cost of production guidance for the aluminium business in H2?

In our analysts’ call we have guided that Q3 cost of production will be 2-5 percent lower because it will take some time for the lower cost coal to come into the inventory.

I think in Q3, Q4, you will start seeing a much bigger drop in the cost of production. But we have not given any guidance because we want to be certain about the availability and price of coal in Q3. Today, the availability and price of coal has the biggest impact on our business.

Novelis has been under some cost pressure. What’s the outlook?

The uncertainty around Novelis business is quite clear. It's the high cost inflation that's visible in the western markets now. The LME (London Metal Exchange) premiums have come down, hence the scrap benefit has come down. And there is tremendous volatility in energy prices in Europe. Plus, there’s higher-cost inventory in the system, which got built up during Q1 and Q2, and will go to market in Q3 and Q4.

We are very confident of the top line for Novelis, and believe that some of these headwinds will work themselves out over the next two quarters. Hence, we are confident that we will continue to meet our EBITDA targets of $525 a tonne.

How do you plan to get the EBITDA per tonne under control in Q3 and Q4 at Novelis?

We have guided EBITDA to be lower by $75-125 per tonne, and for it to get back to ~$500+ tonne, we are expecting the high-cost inventory to go out of the system in Q3 and Q4. We are expecting the scrap benefits to normalise. We are expecting the scrap benefits to come back to normal levels. And of course, energy prices in Europe have dropped dramatically. If they stay at these levels, then these headwinds could unwind over Q3, Q4, and as we enter the new financial year in FY24, we will hopefully be back to that $500+ EBITDA per tonne.

The Novelis guidance has been trimmed by 30 percent. Its business environment is uncertain right now. Is the company looking at some capex cuts at the group level?

We have been very clear that our existing projects — especially the $2.5 billion Bay Minette project, the Indian downstream projects — are going full steam ahead.

We have decided to keep Novelis' net debt-to-EBITDA at around 2.5. With these financial constraints, all we’re saying is that we will moderate the launch of new projects in line with our cash flows, because we have decided not to borrow and launch new projects.

So what is the net debt-to-EBITDA level that you expect to maintain by the end of the financial year? And what is the level right now?

Net debt to EBITDA stands at 1.47 times at the consolidated level, 0.47 times in India, 2.4-2.5 times at Novelis, and should be about 1.5-1.6 times on March 31st of this financial year.

What’s the hedging strategy for H2FY23 and FY24?

Currently we are 30 percent hedged at $2,500 for the second half of FY23, and about 5 percent hedged for FY24 at $3,000. We are watching the current prices and the volatility, but we will not hedge at the current levels. We think there is more upside to the LME prices.

The fact that we have only a 5 percent hedge shows you the degree of uncertainty in LME prices next year. Like you said, it's a fairly uncertain environment. So the Chinese zero COVID policy, the energy crisis in Europe, the inflationary and the high interest rate environment in the US – these things need to settle down for there to be some stability in commodity prices. Till then you're going to see sharp ups and downs. I think the best thing to do in this sort of very uncertain environment is not to speculate on commodity prices and try to increase your hedge percentages.

We've seen a sharp uptick in base metal prices in the past one week or so. What's your assessment?

At this stage I think the LMEs bottom is more at $2,200/ton because the cost curves are all at that level. From that level, hopefully, there can only be an upside because supply and demand are both quite tight, and energy prices are high. I think that there can be an upside if the macro environment improves.

The spot prices of energy in Europe have moderated dramatically because they have enough gas in the tank and the winter has not been so cold. But I think the uncertainty will be back come March-April next year again. Thus, unless Europe’s energy is resolved, you may see a couple of months of low prices, but it could rise pretty fast again.

India’s cost of production has nothing to do with Europe’s energy crisis. This is a completely domestic matter and related to the availability and price of domestic coal.

How are the coal linkages right now? What's the mix there?

We are still getting only 75 percent of the contracted amount. As coal availability improves, we expect that 75 percent will go back to 90 percent-plus, which will have a significant impact on our cost of production.

The copper business has been constantly hitting $5 billion-plus EBITDA levels. What's the new benchmark for that division?

In the next few quarters you should see somewhere between $450 and $500 per tonne because sulphuric acid prices are starting to correct a little bit. We are quite sure that the TCRC (treatment charge, refining charge) benchmark will go up from 1st January 2023.

So as long as we can steady our operational performance, copper should do reasonably well going forward. As you said, the last few quarters have been very good for copper.

All the steel companies have reported mark-to-market (MTM) losses this quarter. Do you expect the same to happen in Q3?

Yes, absolutely. But the LME has to crash for us to be in that situation. So far we do not foresee anything. We are still EBITDA-positive per tonne, and I don't think we will see MTM losses.