| Hindalco Industries Limited | ||||||||||
| Rating outlook revised to 'Positive'; Ratings reaffirmed | ||||||||||
| Rating Action | ||||||||||
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| 1 crore = 10 million | ||||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook for long-term rating on the non convertible debentures of Hindalco Industries Limited (Hindalco) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL AA’. The rating on the commercial paper programme has been reaffirmed at ‘CRISIL A1+’.
Ratings factor in continued strong resilience in operations of Hindalco’s subsidiary Novelis Inc (Novelis; rated ‘BB-/ Stable’ by S&P Global), high cost efficiencies in Hindalco’s domestic operations and improving financial leverage.
While profitability in domestic aluminium business is exposed to volatility in London Metal Exchange (LME) aluminium prices, the conversion nature of the company's large downstream operations at Novelis with its increasing share in consolidated profitability (estimated to contribute more than 70% to consolidated earnings before interest, tax, depreciation and amortisation {EBITDA} in fiscal 2021 against around 65% in fiscal 2020 {pre-Aleris}) lends stability to Hindalco's aggregate profitability.
Fiscal 2021 witnessed faster-than-expected recovery from the second quarter onwards after the first quarter saw demand impacted by the pandemic. Healthy demand from beverage can segment, coupled with recovery in demand from auto and specialties resulted in improved profitability for Novelis. Adjusted EBITDA per tonne increased to more than USD 500 in the third quarter of fiscal 2021 from less than USD 330 per tonne during the first quarter. Recovery in aluminium demand, along with higher London Metal Exchange (LME) prices, also led to strong improvement in domestic profitability.
Overall, higher-than-expected EBITDA (estimated to be more than Rs 17,000 crore in fiscal 2021) is estimated to result in consolidated adjusted net leverage (ratio of adjusted net debt to EBITDA) of 3.1 times for fiscal 2021, against earlier expectation of above 3.5 times.
The impact of distress sale of Aleris’ manufacturing plant in Lewisport, USA, during fiscal 2021, was offset by better-than-expected operating profitability in the remaining business segments of Aleris (especially building and construction) and higher-than-forecasted synergy gains.
Positive outlook on Hindalco’s rating factors in increased likelihood of Hindalco witnessing sustained improvement in operating profit, driven by synergistic integration of Aleris and improving mix towards high-margin auto, building and construction, and aerospace segments. Additionally, with well-defined capital allocation approach having focus on only downstream capacities at both domestic operations and Novelis, Hindalco may generate sizeable free operating cash flow and improved return on capital employed (RoCE) over the medium term. This, along with no major inorganic growth acquisitions, should support continued deleveraging over the medium term. Sustained structural improvement in business profile with rising share of downstream capacities along with faster-than-expected reduction in adjusted net leverage to below 2.5 times by fiscal 2022 may result in a rating upgrade.
That said, India is currently experiencing an intense second wave of the Covid-19 pandemic, which has moderated in developed countries. Given that majority of Hindalco’s consolidated business is driven by Novelis, CRISIL Ratings does not expect any material impact on the company. However, this shall remain a key monitorable.
The ratings continue to reflect Hindalco’s established market position in the Indian aluminium industry and strong resilience of the business risk profile driven by robust profitability at Novelis and cost-efficient domestic operations. These strengths are partially offset by moderately high but reducing leverage, and susceptibility to volatile metal and input commodity prices. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of Hindalco and all its subsidiaries, including Novelis and Utkal, because of strong business and financial linkages.
The company’s profit after tax (PAT) and networth have been adjusted for amortisation of goodwill arising from acquisitions. Also, consolidated adjusted debt includes net deficit related to unfunded portion of post-retirement benefit obligations 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
Hindalco is among the leading players in the domestic non-ferrous industry with more than 40% share in flat rolled products market. The company 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. This provides Hindalco strong economies of scale to compete globally, thereby diversifying its revenue mix. In fiscal 2020, Hindalco generated around 30% of its revenue from sales in export markets. While the company witnessed increased export sales in domestic aluminium business during the first half of fiscal 2021, to offset fall in domestic demand, exports have witnessed gradual reduction to past levels during the second half of the fiscal. The company should continue to sustain the geographical diversity of its revenue profile over the medium term.
Hindalco benefits from a fairly low cost of production for the aluminium operations, with its smelters occupying a first or second quartile position in global cost curves. The company also benefits from full alumina integration with captive bauxite mines, and relative stability in coal costs with about 90% coal security through a combination of linkage from Coal India Ltd and captive coal blocks. However, high coal costs for Hindalco post deallocation of its coal blocks continues to suppress its return on capital employed ratio. Hindalco’s domestic profitability had moderated in fiscal 2020, on account of softening of aluminium realisations and operating challenges at its copper smelter. These challenges continued during the first quarter of fiscal 2021 on account of the Covid-19 pandemic. However, the operating margin for domestic aluminium has improved since the second quarter of fiscal 2021 and is expected to sustain at around 14% over the medium term. Brownfield expansion of its alumina capacities in the current fiscal may further boost profitability.
Novelis is the world’s leading producer of automotive and beverage can sheets. Since it primarily converts aluminium into value-added products, it is less susceptible to volatility in aluminium LME prices. Moreover, investment towards enhancing product mix in the high-margin automotive segment, and the stable can-body-stock segment have supported growth in operating margin. Its position as the world’s largest aluminium recycler (60% of its aluminium consumption) also supports its cost structure. Acquisition of Aleris has further strengthened the product and geographical diversity of Novelis with addition of the high-margin aerospace and specialty segments, and increased access to Asia-Pacific region. Adjusted EBITDA per tonne for Novelis has steadily increased to USD 460 per tonne in the first nine months of fiscal 2021 from USD 308 per tonne in fiscal 2016. With increasing share of Novelis, its contribution to consolidated profitability is estimated to be more than 70% in fiscal 2021, against 52% in fiscal 2016, providing increased stability.
The company’s strategy to expand in downstream aluminium, along with increased share of high-margin product segments in Novelis, should support improved profitability, going forward.
Weaknesses
Consolidated net leverage (ratio of adjusted net debt to EBITDA) was impacted in fiscal 2021 due to the increased acquisition debt along with lower-than-expected sale proceeds from divestment of Aleris’ Lewisport plant. While it was partially offset by improved profitability, net leverage is estimated to remain moderately high at 3.1 times as on March 31, 2021 (3.1 times as on March 31, 2020). However, it is expected to improve to less than 2.5 times by fiscal 2022, backed by improved profitability with global recovery post disruption caused by the pandemic in fiscal 2021. Thus, interest coverage and net cash accrual to total debt ratios are expected to sustain at more than 4.5 times and 0.20 time, respectively (estimated at 4.0 times and 0.15 time, respectively, as on March 31, 2021). Financial flexibilities should remain strong, supported by strong refinancing ability and healthy cash surplus.
The domestic aluminium business remains exposed to any adverse movement in aluminium prices, as witnessed in fiscal 2016 and in the first half of fiscal 2021. Furthermore, operating margin remains susceptible to increase in the prices of input commodities (coke and pitch), which the company may not be able to completely pass on to customers. While coal linkage security has been increased, it remains susceptible to rise in Coal India Ltd prices, non-fulfilment of linkage, and increased dependence on e-auction coal. However, vulnerability to commodity prices is mitigated by the conversion nature of both Novelis and the copper business, which contribute more than 75% of consolidated EBITDA. |
Liquidity: Strong Annual cash accrual is expected to be Rs 12,000-13,000 crore during fiscals 2022 and 2023, against expected annual capex of Rs 7,500-8,000 crore. Scheduled consolidated term debt repayment is around Rs 5,400 crore and around Rs 6,000 crore in fiscals 2022 and 2023, respectively. Furthermore, liquidity is supported by liquid investments of more than Rs 18,000 crore (combined for standalone India business and Novelis) as on March 31, 2021. Additionally, Hindalco (India) has unutilised fund-based bank limits of around Rs 9,750 crore and Novelis has around USD 1,500 million unutilised limit under an asset-backed revolving credit line, as on March 31, 2021. |
Outlook: Positive CRISIL Ratings believes Hindalco’s business will continue to benefit from its well diversified, cost-efficient operations with increasing proportion of downstream conversion capacities. Expected improvement in profitability, lower capex and utilisation of free cash flow towards debt reduction will support continued deleveraging and improved financial profile. |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company Hindalco, the flagship company of the Aditya Birla group, commenced operations in 1962 with an aluminium unit in Renukoot, Uttar Pradesh. It is the second-largest aluminium manufacturer in India, with capacity to produce 1,300 kilo tonne per annum (ktpa) of aluminium and 2,900 ktpa of alumina. The company also 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 6.0 billion. It supplies aluminium sheets and foils to the automotive 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 has 13 plants that manufacture aluminium rolled products across North America, Europe and Asia, serving diverse industries including aerospace, automotive, building & construction, commercial transportation, and industrial manufacturing.
In the first nine months of fiscal 2021, Hindalco’s consolidated reported revenue was Rs 91,478 crore, with EBITDA of Rs 13,051 crore, and net profit of Rs 1,555 crore, against Rs 88,826 crore, Rs 11,363 crore, and Rs 3,099 crore, respectively, in the corresponding period of the previous fiscal. |
Key Financial Indicators - Consolidated; CRISIL-adjusted numbers
*Adjusted for treatment of goodwill, mining rights, and other intangible assets |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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