We will continue to do well as our plants and operations are running stably: Satish Pai

21 February 2017

The Financial Express

After a successful third quarter performance despite negative impact of demonetisation Hindalco Industries is hopeful that spurt in London Metals Exchange prices since January, if stays stable it's going to help the company positively in coming quarters. Satish Pai, managing director of Hindalco Industries in an exclusive interview with FE’s Vikas Srivastava however, cautions, there could be headwinds coming from high input cost or cost inflation in the first quarter (April-June) of next fiscal. Excerpts:

How do you expect the fourth quarter of the current fiscal and the first quarter of next financial year (2017-18) in the light of rising LME prices?
LME Prices have been remarkably strong since January 7 aided by news reports that China is going to cut its capacity, although I have my doubts about that. The prices have gone up from $1,700 per metric tonne to $1850/mt tn and have been holding on to it. We believe if LME prices continue at this level — supported by our topline — we should continue to have good results as our plants and operations are running stably now. However, the flip-side is there is a little bit of headwinds coming from the input cost. Since the oil prices have gone up, carbon, which is big part of aluminium business, has moved up. Furnace oil has gone up, caustic soda has gone up, and we are also seeing e-auction prices of coal slightly going up. So there is little bit of cost inflation that we are seeing. Since most of my purchases for Q4 are done, I am more cautioned about the input cost inflation for the next year.

What is your outlook on coal prices and your coal requirements? Whether all your three mines are producing at full capacities?
I am slightly concerned since coal prices have been remarkably good. We really want Coal India to keep its production up. Coal spot auction prices have inched up, normally during winter period it should be down. This monsoon I am little bit concerned, but now I have my own mines coming in, so it gives me more comfort. We buy around 4-4.5 mln tn out of our 16 mln tn requirement. Once all our mines are producing, our dependence will come down to 3 mln tn. We are also open to bidding in the next round of coal auctions to secure our coal requirements.

Given the impact of demonetisation on demand in the third quarter, how was the capacity utilisation?
Our Aluminium plants are running at full capacities. But at Hirakud phase I in Odisha we do not plan to increase production. In fact we have shut one line there. (The cost of production is over $1,600/tn compared with below $1,500/tn at company’s other three plants). This is fully integrated with our downstream plant and we only produce as much aluminium we need. We don’t sell from this plant, and the advantage is that there is no transportation cost involved.

During the quarter copper division capacity was slightly lower due to capacity shutdown, and a weak domestic demand. We did not produce so much copper rods, we just exported the cathode that is used as raw material to make copper rods.

In the light of higher LME prices and expectations of improvement in domestic demand, what are your expansion plans, going ahead?
On the upstream side we do not plan any expansions in the near future. Any expansions are now going to be in less capital intensive downstream business. We have around 350 kilo tn per annum of value added products that we want to double over the next five years at an investment of around Rs4,000-Rs5,000 crore. Also, on the Alumina side we may look at de-bottlenecking the Utkal plant from 1.5 mln tn per annum to 2-2.5 mln tn as a brownfield expansion. It will cost us around Rs600 crore over the next two years. The engineering study will happen over 2017-18 and the implementation in 2018-19.

What are your fund requirements and debt payment obligations going ahead? How do you plan to achieve them?
After refinancing the Novelis debt of $4.7 bn and saving around $80m per year on the interest cost. Our focus has now shifted to Hindalco in India, which has a net debt of Rs.27,000 crore. We want to deleverage faster. The consolidated debt to Ebitda is of 4.5 and we want to bring it down to 3 in two years time. We also have one Rs.6,000 crore bond that is due in 2022. If we continue at the steady rate we will finish the current year at 4.5 times of debt to ebitda, next year at 4 times and in the year after that at 3.5x. If LME remains at same level it would take two years of organic growth to achieve our deleveraging target.

As far as fund raising is concerned we have taken an omnibus approval from the board to raise equity up to Rs.5,000 crore. It can be in any form including a Qualified Institutional Placement.