Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A1+’ rating to the commercial paper of Hindalco Industries Ltd (Hindalco).

 

The rating reflects the strong operating performance in the nine months of fiscal 2023, driven by healthy aluminium demand, robust prices despite moderation, diversified product mix and a well-defined capital allocation approach. The high operating performance supported healthy cash accrual, resulting in comfortable financial risk profile: consolidated net debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio was around 1.9 times as on December 31, 2022 (1.6 times as on March 31, 2022, and 2.9 times as on March 31, 2021).

 

The rating also factors in the continued strong resilience in operations of Hindalco’s subsidiary, Novelis Inc (Novelis; rated ‘BB/Stable’ by S&P Global Ratings), high cost efficiency in domestic operations and increased focus on downstream capacities at both Hindalco and Novelis, which should result in healthy operating cash flow over the medium term.

 

While profitability in the domestic aluminium business is exposed to volatility in London Metal Exchange (LME) aluminium prices, the conversion nature of the large downstream operations at Novelis (with consolidated Ebitda share of >65%, excluding fiscal 2022 when it was ~52% due to increased share of domestic aluminium business following high LME prices) lends stability to Hindalco's aggregate profitability.

 

That said, aluminium prices have reduced during the current fiscal (to ~USD 2,324 per tonne in the third quarter of fiscal 2023 from >USD 2,700 per tonne for fiscal 2022) amid global macro headwinds and moderation in production and demand in China. Global aluminium demand growth is estimated to have moderated by 0.5% in calendar year (CY) 2022 (after witnessing robust growth of more than 6% in CY2021). However, revival of demand in China amid easing lockdown restrictions is expected to support global aluminium demand growth by 1.5-2.5% in CY2023. Furthermore, limited supply additions and high energy costs are likely to support aluminium prices over the medium term. Aluminium prices are likely to remain at USD 2,400-2,500 per tonne through fiscal 2024, which is still higher than pre-2022 levels. This, along with cost efficiency of the domestic aluminium business and the stable converter business of Novelis, should support healthy operating profitability for Hindalco, with expected consolidated Ebitda of around Rs 25,000 crore in fiscal 2024 (Rs 29,000 crore in fiscal 2022 and an estimated Rs 23,000-24,000 crore in fiscal 2023). Any significant decline in global demand and higher-than-expected fall in aluminium prices will remain a key monitorable.

 

The company is planning to ramp up its organic growth capital expenditure (capex) totaling around USD 8 billion over the medium term, which is likely to be funded through healthy consolidated annual cash accrual; hence, debt obligation is expected to be minimal. Of the total capex, around USD 4.8 billion (to be incurred till fiscal 2025) has been committed while the remaining around USD 3-3.4 billion is under appraisal. However, as per the capital allocation approach, the capex plans are to be entirely funded through internal accruals. Further, there remains flexibility towards uncommitted capex. That said, with expectation of limited free cash flow generation (post capex) and expected moderation in Ebitda during the fiscal, consolidated net leverage (including unfunded pension obligation), it is still expected to remain comfortably below 2.5 times over the medium term.

 

The rating reflects the strong resilience of the business risk profile of Hindalco, driven by robust profitability at Novelis, established position in the Indian aluminium industry, and cost-efficient domestic operations. These strengths are partially offset susceptibility to volatility in metal and input commodity prices.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Hindalco and its subsidiaries, including Novelis and Utkal Alumina International Ltd, as these entities have strong business and financial linkages.

 

The profit after tax (PAT) and networth of Hindalco have been adjusted for amortisation of goodwill arising from acquisitions. Also, consolidated adjusted debt includes net deficit related to the unfunded portion of post-retirement benefit obligation for Novelis.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the domestic non-ferrous industry: The company is among the leading players in the domestic non-ferrous industry with more than 40% share in the flat-rolled products market. It is also a leading copper producer in India, with its integrated copper smelting complex in Gujarat being one of the largest single-location custom copper smelters in the world. Thus, it has strong economies of scale to compete globally, thereby diversifying revenue mix. In fiscal 2022, Hindalco generated around 32% of its revenue from the export market. Geographical diversity in revenue is likely to sustain over the medium term.

 

• Healthy operating efficiency of domestic aluminium operations: Hindalco benefits from its low cost of production for aluminium, with its smelters occupying first or second quartile position in global cost curves. The company also benefits from full alumina integration with captive bauxite mines, and stable coal cost with around 90% coal security through a combination of linkage from Coal India Ltd and operational captive coal blocks. Coal security for the domestic business is further supported by acquisition of Chakala mine (reserves of ~50 MT, acquired in fiscal 2021) and Meenakshi mine (reserves of 286 MT, acquired in fiscal 2022). These mines are expected to operationalize over the next two fiscals, which should help the company to meet more than 90% of its coal requirement through captive sources. Increase in aluminium prices had improved operating margin of the domestic business to more than 20% in fiscal 2022. While margin has moderated from fiscal 2023 with reduction in prices and high energy cost, it is expected to sustain at around 14% over the medium term. Focus on increasing share of value-added products shall also support profitability over the medium term.

 

• Product and geographical diversity of Novelis, with healthy and stable conversion margin: Novelis is the world’s leading producer of auto and beverage can sheets. As it primarily converts aluminium into value-added products, it is less susceptible to volatility in aluminium LME prices. Investment towards enhancing product mix in the high-margin auto segment and the stable can-body-stock segment have supported growth in operating margin. Its position as the world’s largest aluminium recycler (more than 60% of its aluminium consumption in fiscal 2022) also supports cost structure. Acquisition of Aleris has further strengthened the product and geographical diversities of Novelis with addition of the high-margin aerospace and speciality segments, and increased access to the Asia-Pacific region. Adjusted Ebitda per tonne increased steadily to USD 530 per tonne in fiscal 2022 from USD 470 per tonne in fiscal 2021. However, amid inflationary cost pressure, reported adjusted Ebitda per tonne moderated to USD 472 per tonne in the nine months fiscal 2023, though remaining healthy. The contribution of Novelis to consolidated profitability was >65% for fiscals 2020 and 2021 and >55% in the nine months fiscal 2023 (declined to 51% in fiscal 2022 due to sharp rise in aluminium prices, which led to increase in the share of the domestic aluminium business).

 

The company’s strategy to expand in downstream aluminium along with the increased share of high-margin product segments should support profitability over the medium term.

 

• Strong financial risk profile: High profitability led to net cash accrual of more than Rs 20,000 crore in fiscal 2022, thereby reducing consolidated net debt (including unfunded pension obligation) to Rs 44,069 crore as on March 31, 2022, from 53,916 crore in the previous fiscal. Net leverage (including unfunded pension obligation) and interest coverage ratio improved to around 1.6 times and 7.8 times, respectively, in fiscal 2022 from around 3 times and 5 times, respectively, in fiscal 2021.

 

However, moderation in operating profitability during fiscal 2023 amid lower aluminium prices and increased cost of production are expected to weaken net leverage to around 2 times and interest coverage ratio to 6.5-7.0 times.

 

Going forward, with expected increase in capex (to be funded through internal accruals) the net debt is expected to largely remain stable. However, with expected moderation in EBITDA net leverage is increase from the levels of fiscal 2022 but should remain comfortably below 2.5x over the medium term. Financial flexibility will remain strong, supported by healthy cash surplus and strong refinancing ability.

 

Weakness:

• Susceptibility of the domestic aluminium business to volatility in metal and input commodity prices: The domestic aluminium business is exposed to adverse movements in aluminium prices, as witnessed in fiscal 2016 and the first-half of fiscals 2021 and 2023. Operating margin is susceptible to increase in raw material (coal, coke, and pitch) prices, which the company may not be able to completely pass on to customers. While coal linkage security has increased and is expected to rise further over the medium term, it remains susceptible to increase in Coal India Ltd prices, non-fulfilment of linkage and increased dependence on e-auction coal, as seen in fiscal 2023. However, this is mitigated by the conversion nature of Novelis and the copper business, which contribute around 75% (except in fiscal 2022) to the consolidated Ebitda.

Liquidity: Strong

Consolidated annual cash accrual (post-dividend) is expected at Rs 17,000-18,000 crore during fiscals 2023 and 2024, against expected capex of Rs 15,000-20,000 crore per fiscal, and scheduled term debt obligation of around Rs 6,000 crore and Rs 114 crore in fiscals 2023 and 2024, respectively. Furthermore, consolidated liquid investments stood at around Rs 18,000 crore as on December 31, 2022. Additionally, consolidated liquidity is supported by unutilised fund-based limits in Hindalco and Novelis.

 

ESG profile of Hindalco

Hindalco has a dominant position in the non-ferrous metals industry in India. Novelis supplies aluminium sheets and foils to the automotive and transportation, beverage and food packaging, construction and industrial, and printing industries. These two businesses account for over 90% of the Ebitda. Hence, for the ESG assessment, CRISIL Ratings has evaluated Hindalco’s aluminium business along with Novelis.

 

CRISIL Ratings believes Hindalco’s ESG profile supports its already strong credit risk profile. The metal and mining sector has a significant impact on the environment owing to high greenhouse gas emissions, waste generation and water consumption. This is because of the energy-intensive manufacturing process and its high dependence on natural resources such as coal as key inputs. The sector also has a significant social impact because of its large workforce across operations and value chain partners, and also due to its nature of operations affecting local community and health hazards involved.

 

Key ESG highlights:

• Hindalco has formed a board-level sustainable committee chaired by its managing director, which meets periodically to keep track of performance and discuss areas of improvement.
• It has set up a task force at the plant level that works on initiatives related to energy, water, waste, and air quality management. Energy-intensive operations have led Hindalco to focus especially on adopting efficient ways of using energy.
• The company aims to improve renewable energy contribution in its portfolio, which increased to 100 megawatt (MW) in fiscal 2022 from 49 MW from 2021. Additionally, 78.5 MW of renewable capacities are at various levels of execution. The company also plans to add 100-300 MW of pumped hydro renewable hybrid capacities through third party, which is expected to complete by December 2023.
• Hindalco aims to become carbon neutral by 2050. It also aims to become water positive in all mining locations and reduce its net loss on biodiversity to nil by 2050.
• The company’s loss time injury frequency rate of 0.28 in fiscal 2022 is among the lowest in the industry and has improved from 0.46 in fiscal 2021.
• The governance structure is characterised by 50% of the board comprising independent directors (one having tenure exceeding 10 years), split in chairman and MD positions, dedicated investor grievance redressal mechanism and healthy disclosures.
• There is growing importance of ESG among investors and lenders. Hindalco’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets (mainly at Novelis).

Rating Sensitivity factors

Downside factors:

• Sustained weakening of profitability resulting in lower-than-expected cash accrual, with net cash accrual to annual debt repayment ratio reducing to less than 1.0 time
• Steady increase in net debt to Ebitda ratio to more than 2.5-2.7 times

About the Company

Hindalco, the flagship company of the Aditya Birla group, commenced operations in 1962 with an aluminium unit in Renukoot, Uttar Pradesh. The company is the second-largest aluminium manufacturer in India with capacity of 1,300 kilo tonne per annum (KTPA) of aluminium and 2,900 KTPA of alumina. It has a custom smelter with copper cathode capacity (including recycling) of 421 KTPA in Dahej, Gujarat.

 

Novelis, a 100% stepdown subsidiary of Hindalco, was acquired in May 2007 for USD 6 billion. It supplies aluminium sheets and foils to the auto and transportation, beverage and food packaging, construction and industrial, and printing industries.

 

Aleris, a wholly owned subsidiary of Novelis, was acquired on April 14, 2020, for USD 2.8 billion. It manufactures aluminium-rolled products and has 13 plants across North America, Europe and Asia, serving diverse industries including aerospace, auto, building and construction, commercial transportation and industrial manufacturing.

Key Financial Indicators

Consolidated; CRISIL Ratings-adjusted numbers

As on / for the period ended March 31	Unit	2022	2021
Operating income	Rs crore	194,741	131,456
PAT*	Rs crore	13,730	3,483
PAT margin*	%	7.0	2.6
Adjusted debt / adjusted networth*	Times	1.26	1.93
Interest coverage	Times	7.82	4.69

* Adjusted for the treatment of goodwill, mining rights and other intangible assets

Any other information: Not applicable