Hindalco MD Pai: Worst over for Novelis, improvement expected from Q4

Hindalco managing director Satish Pai

Novelis, the wholly-owned subsidiary of Hindalco Industries that makes beverage cans, reported a 95 percent drop in net profit to $12 million for the December quarter, as net sales fell 3 percent to $4.2 billion.

Hindalco managing director Satish Pai spoke to Moneycontrol about receding cost pressures for the company's Indian business, better prospects for Novelis, and the potential impact of tariffs on Russian aluminium, among other topics.

After a 63 percent drop in Hindalco’s consolidated profit and a 48 percent decline in operating profit, will financials improve in Q4 and FY24?

Let’s just break up the Q3 performance to India and the Novelis side. It'd be fair to say that the Indian performance in Q3 was quite good. It met the street’s expectations. And if you look at the copper performance, it was 40 percent up year-on-year. So on the India side, we had a relatively good quarter.

Novelis was quite impacted during this Q3, largely because many of our can customers [were] going through a destocking period. We think the worst is over for Novelis and from Q4 you will start to see an improvement.

Do you see cost pressures receding now? Which divisions and what kind of incremental EBITDA can we look at from those options?

On the India aluminium side, coal, which is one of our largest costs, [from] Q3 to Q2, coal costs came down about 20 percent, availability went up. So our cost of production came down by about 5 percent. In Q4, we see another 5 percent improvement in the cost of production of aluminium.

On the Novelis side, besides the can destocking, energy prices in Europe have corrected quite sharply because the winter was not as severe. Freight rates, especially shipping rates, have dramatically turned around now.

So both on the India side as well as the Novelis side, many of the inflationary cost pressures are starting to moderate. That's why we are confident that going forward in Q4, the results will be better.

What would the incremental EBITDA percentage for Novelis and the Indian division – the aluminium business to be precise – look like?

I don't think I'll give a percentage. What we have communicated to the street is that Novelis’ EBITDA was 346 million tons in Q3. For sure, you're going to see a number starting with four for Novelis. On the India aluminium side, we had about $555 per tonne EBITDA. You should easily see a couple of $100 more on that as well in Q4.

You said the worst is behind Novelis, after unfavourable foreign exchange and inflationary pressures. What will drive demand for Novelis?

Fundamentally, demand had not been impacted. What happened is that many of our customers actually ran down their inventory because their inventories had gone up quite a lot. So, ultimately, if you look at [beverage] can demand, can demand year-on-year has not dramatically changed. But our shipments went down because many of our customers were destocking.

If you look at auto, we have actually been having record auto supplies going out. Aerospace has been booming. What you have seen in Q3 is transitory because it was destocking of inventories. I don't think that demand has been any weaker. Can normally is very resilient. Even in upturns or downturns, can demand does not swing dramatically.

Will China’s reopening spark some incremental demand that was locked up for the past three years and increase volumes and realisations?

Everybody in the metals business is hoping that the Chinese economy picks back up because 50 percent of any metal demand is in China. And China has been very draconian with Covid. So now that they have opened up, I think all of us are hoping that their domestic demand and domestic consumption picks back up. If it does, then certainly commodity prices have an upside.

When you say upside, what would that number look like? Could you put some perspective on that number?

If you look at the bottom that we have already hit on the aluminium side, it was around 2,200 to 2,100… On the upside, I think it could be anywhere between 2,600 and 2,800.

Do you think some amount of growth in prices will come from US plans to impose a 200 percent tariff on Russian aluminium?

It will have no impact positively on aluminium prices because very little of the Rusal aluminium anyway goes to the US. Our worry is actually the opposite, that it goes more into Asia, and then they have to sell it at a discount, which will then impact aluminium prices negatively. So I don't think there are any positives because, like you have seen with oil and other commodities, the demand pattern just ships around and it goes to other parts of the world.

How was the budget for you? Is there any kind of positive that you're looking at?

The biggest positive for us in the budget is the very clear government focus on infrastructure capital expenditure. If the roads, the railways, the Vande Bharat [trains], the infrastructure on airports, ports, all that actually gets built, that will dramatically have an impact on demand for aluminium, and copper. What excites us the most about the budget is the very clear focus on infrastructure capex.

Do you see the on-ground reality on that front changing any time soon or is it more of a long-term shaping up of the picture?

We have constantly been trying to move aluminium demand to aluminium rakes, to aluminium trains, to trucks and trailers. So all that is starting to happen. We have already started to make aluminium boxes for the last-mile delivery vehicles. We are trying to make the Vande Bharat train bogeys out of aluminium. We hope to see the impact of that demand next year itself.

Consolidated net debt to EBITDA was 1.60x as of December 31 compared with 1.62x a year ago. Can we expect improvement on that front?

Yeah, I mean, if you look at that 1.6, you have to split it up. The India business was at 0.26 net debt to EBITDA and Novelis was actually at about 2.6. So with the EBITDA of Novelis going down, the net debt to EBIT of Novelis went up. If you look at the balance sheet of both companies, it's very strong.

In India, our net debt is only around Rs 3,000 crore. In Novelis, most of it is bonds that have already been refinanced. So any movement in the net debt to EBITDA is because of the EBITDA of Novelis going down in Q3 and it will be slightly low as well compared to the previous quarters in Q4. But generally, the debt situation and the balance sheet situation in overall Hindalco consolidated is very strong and you should see the consolidated net debt to EBITDA be in that 1.6 type of range.

What is the percentage of debt reduction targeted in the ongoing quarter?

We have refinanced bonds at 3 and 1x, and 3 and 3x for the next 10 years. So we don't see any debt reduction going on in Novelis. And if you look at the India business, this year we have paid down roughly Rs 8,500 crore – Rs 6,000 crore of debentures and Rs 2,500 crore of Utkal loans. So the absolute debt reduction is now more or less over. Now, we just keep within the band of net debt to EBITDA that we promised.