Largest macroeconomic uncertainty is the status of the Chinese economy: Hindalco MD

The important part is the sequential improvement because we went through a pretty tough Q2 and Q3. And as we have been saying, as markets improve, input costs go down, our performance will improve. And that's what happened in Q4. So, if you look at it sequentially, PAT was up 77 percent, EBITDA was up nearly 48 percent. So, the sequential improvement has been strong because costs have come under control, and demand was good. The Q4 to Q4 (Y-O-Y) comparison is tough because in Q4 of last year, aluminium prices spiked to nearly $3,500 to $4,000 a tonne when the worst started. But I think the real performance is sequentially, which is what the markets have noticed.

Give us a sense of how the India operations in the initial part of FY24 are shaping up, in terms of your demand outlook both for copper and aluminium. And in this context, you are adding capacity. So how much of that comes on stream? Second, how are you seeing LME (London Metal Exchange) prices moving?

Let’s start with the economic demand situation in India. Both aluminium and copper Q4 showed a nearly 10 percent demand increase versus Q4 of last year. So really, this year has started off very good for us — both aluminium and copper demand is very strong. I think then let's go and look at the cost side. The costs are also getting under control. Q4 costs were down 6 percent versus Q3. So, we are expecting that same cost advantage to continue into Q1 and Q2.

The LME is more of an external worldwide economic indicator, and largely, the LME is a little weak right now. And that's largely because of macro-economic uncertainty on whether it's the Chinese economy, or whether it's the story of the US with the debt ceiling. So, these are keeping the LME levels at a slightly lower level right now. Now, if you look at capacity additions in India, as you said, we invested last year and we'll continue to invest this year. We have 30KT (kilotonnes) of extrusion project from the Silvassa plant, which was just commissioned in January-February, and another 170KT worth of rolling capacity that will come in Orissa in Sambhalpur — that project is under execution and will be coming up in the next 24 months. So, that's from the capacity addition point of view for aluminium. And on the copper side, we are investing in copper tubes for air conditioners, and that 20 KT should be coming on stream in the next 18 months.

You have earlier explained much of the weakness at Novelis is because of the change in the consumption pattern post the pandemic and a related destocking of the supply chain. So, how long do you expect that destocking to continue? By when do we see a full recovery?

When we did the call in February, we said that the destocking will continue in Q4 and Q1. And we see that now. I think that Q4 destocking went as we thought it would; Q1, you will still see some residual destocking, especially on the can side. And I think then, you know Q2, Q3 onwards, we are hopeful that the can volumes will come back.

Give us a macro view on markets such as the US and Europe. We've seen a lot of economic weakness anticipation there. How do you see that playing out, specifically in terms of commodity prices and demand for commodities yours?

I think for us, the bad news of Europe is more or less factored in. In fact, we believe that there is only an upside in the Europe economy. In the US, we'll have to see what happens with the recent debt ceiling crisis. But generally people think that interest rates, probably the number of increases, are not going to happen anymore. And people actually are thinking that you should start to see some cuts towards the second half of the year. I think the largest macro-economic uncertainty is the status of the Chinese economy. And on that, I think we'll have to look at more data in the coming months. Then it will get clearer.

Also, how is the Russia part of the pie looking, given the sanctions on Russian aluminium? How much of an impact do you expect that to have?

I do not think it has had any significant impact on the LME prices. It is true that most of that is going into Asian warehouses, but it seems to be getting consumed in Asia and in China. And I don't think it has had any major negative impact on LME prices as many people are speculating.

And you expect that to continue?

Yes, I think so. I don't think it'll have a big impact.

Moving on to your debt profile and capital expenditure plans, you have indicated Rs 5,000 crore for India this financial year and another $1.8 billion for the US operations. You also indicated you will not be seeking to raise fresh debt. Give us some sense on the debt profile, net debt numbers and there was some working capital release you were expecting. How does that cost of capital move in FY24?

When the LME comes down from its highs, the inventory valuation goes down, and then you get a working capital release. That is what has happened in Q4. If you look at it, our net debt to EBITDA at the consolidated level is now 1.39. And the Indian business is largely net debt free. So, going forward, I don't think we're going to reduce gross debt anymore. And all the cash that we generate, we will be putting towards our growth capex. So, we think net debt levels, Novelis, you know, quarter and quarter can go up a little bit. But largely, if you take the full year, FY24, you should be seeing the same net debt to EBITDA levels as FY23.

Interest rates have gone up. That's why we do not want to go into the market to borrow at this time. So, we will work with our internal accruals because money costs more now with interest rates where they are.

The cost of capital for us, if you have to, you know, raise more debt, is going to be higher. But really, when we do our ROC calculations, our cost of capital that we assume in the India business is around 11 percent. And in Novelis, it's more like 8 percent.

On the coal side, how are you seeing coal prices? You had indicated some contracts were up for negotiations first in January and then later in April. Further, India’s power demand is on the rise this summer. All put together, how are coal supplies looking for you, and the cost?

Coal availability and coal prices were much better than Q3 and Q2. That being said, we have to realise that coal prices are still much higher than where they were a year ago. So, we'll have to see now in FY 24 how it goes because a lot of commercial mining coal should come into the market. Coal India's production also looks pretty strong. So, we are hoping that coal availability and coal prices will stay at the current levels or start to go down.

Moving to your business segments, earlier in the call with the media on May 24, you indicated you're looking at 30 percent of your aluminium production being low carbon in the next three to four years. Give us some more colour on what that means for your business and how that impacts your margins? Second, what is the potential market for this 30% of volumes that you're aiming for?

Today the reality is nobody pays you extra for low-carbon aluminium. Largely, if you want to do business with certain customers, they will only take low-carbon aluminium. I think that you know our drive to go low carbon is of course driven by our ESG (environment, social and corporate governance) commitments, which we have made to get to net zero carbon by 2050 and also to meet some of our customer requirements. And how we do it in India is that — as mentioned in the last quarterly call — we have signed contracts for round-the-clock renewable energy using pumped hydro. We have nearly 100 and are putting in another 200 megawatts of solar power internally at Hindalco — solar and wind combined. So, as a company, when you put all these together over the next three to four years, we are hoping that we can get to at least 30 percent of our prime production being low carbon. Low carbon, by the way, the definition is less than four tonnes of carbon per tonne of aluminium.

You have indicated that most of your focus would be in aluminium downstream business segments. Take us through the latest developments there.

When you look at the downstream sector in India, we actually see numerous opportunities for downstream value-added products. And so, we are working on last-mile mobility solutions, we are working with aluminium rakes. Many of our customers are electrifying, so we are working on a battery holder to keep the battery in a car — the battery enclosing case is made of aluminium. So, there are a large number of opportunities on the value added side in India as India electrifies more and more. And that is why we have moved into the downstream value-added part more to become a solution provider. That's how we are positioning ourselves.

(Demand) is starting to trickle in……we have got the first few hundreds of last-mile vehicles….we have sold a few hundred bulkers already. So, it's going into the market and the market is looking at the impact and the acceptance. We are at what I would call the inflection point, where aluminisation of many of these things will start to happen. That is what we are working on.

What percentage of your crude aluminium production will be value added?

So, out of the 1.3 million tonnes, we have already said that by 2025, 600 KT will be value-added. And we are working on that already — we are at 400 KT; 30 KT is coming from the new extrusion plant in Silvassa. And another 170 KT is coming from our Orissa project. So, by 2025, we will be at 600 KT of value added products.