Rating Rationale
April 23, 2020 | Mumbai
Hindalco Industries Limited
Rating outlook revised to 'Stable', ratings reaffirmed  
 
Rating Action
Rs.1500 Crore Non Convertible Debentures CRISIL AA/Stable (Outlook revised from 'Positive' and rating reaffirmed)
Rs.3000 Crore Non Convertible Debentures CRISIL AA/Stable (Outlook revised from 'Positive' and rating reaffirmed) 
Rs.100 Crore Non Convertible Debentures CRISIL AA/Stable (Outlook revised from 'Positive' and rating reaffirmed) 
Rs.1400 Crore Non Convertible Debentures CRISIL AA/Stable (Outlook revised from 'Positive' and rating reaffirmed) 
Rs.900 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its rating outlook on long-term debt instruments of Hindalco Industries Limited (Hindalco) to 'Stable' from 'Positive', while reaffirming the rating at 'CRISIL AA'. The rating on the commercial paper has been reaffirmed at 'CRISIL A1+'.
 
The revision in outlook factors in likely increase in company's financial leverage post debt-funded USD 2.8 billion acquisition of Aleris Corporation (Aleris) by its subsidiary Novelis Inc (Novelis, rated 'BB-/ Stable' by Standard & Poors). This coupled with moderation in operating profits in the wake of challenges in aluminium markets amidst the Novel Coronavirus (Covid-19) pandemic may moderate the consolidated net debt to EBITDA (earnings before interest, tax, depreciation, and amortization) to above 3.5 times in fiscal 2021. This is higher than our previous expectations.
 
Ratings at current levels factor in continued strong resilience in Novelis' operations and high cost efficiencies in Hindalco's domestic operations. While weak aluminium realisations may moderate domestic profitability, the conversion nature of the company's large downstream operations at Novelis (estimated to contribute more than 55% to consolidated EBITDA in fiscal 2021) lends stability to Hindalco's aggregate profitability. Acquisition of Aleris may further increase the share of downstream operations and consolidate Hindalco's global position in aluminium flat-rolled products. Aleris also provides access to the higher-margin aerospace segment while increasing share in building and construction segments.
 
With most of the capital expenditure (capex) at Hindalco and Novelis behind, Hindalco may continue to generate positive free operating cash flow in the next two fiscals. This may improve financial leverage (net debt to EBITDA ratio) to below 3 times by end of fiscal 2022. Divestment of Aleris' manufacturing plants in Lewisport, USA and Duffel, Belgium in line with regulatory approvals and utilisation of proceeds towards debt reduction may result in faster improvement in financial leverage making it one of the monitorables.
 
In the wake of the Covid-19 pandemic, aluminium demand and realisations have weakened, both globally as well as in India. While lockdown in India has not disrupted Hindalco's domestic aluminium production, some of the auto facilities at Novelis are temporarily closed due to weak demand. The pandemic is likely to impact revenue in the first quarter of fiscal 2021 and may improve in the subsequent quarters subject to the success of the containment measures implemented by the central and state governments. In this light, Hindalco's ability to sustain its domestic sales volumes through its cost competitiveness, Novelis (including Aleris) sustaining its global shipments on the back of more resilient can volumes and its per tonne profitability through favourable product mix will remain key monitorables. Sharper and more prolonged weakening of profitability most likely owing to continued challenges in aluminium markets may have an impact on Hindalco's ratings.
 
The ratings continue to reflect Hindalco's established market position in the Indian aluminium industry, strong resilience in business risk profile, driven by robust profitability at Novelis, and cost-efficient domestic operations. These strengths are partially offset by moderately high leverage though partly supported by strong cash liquidity and low debt servicing requirement over next the two years, and susceptibility to volatile metal and input commodity prices.

Analytical Approach

For arriving at the ratings, CRISIL 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. Further, Novelis has completed the acquisition of Aleris which shall be consolidated going forward due to its business and financial linkages. Refer annexure for full list of subsidiaries consolidated.  The company's profit after tax (PAT) and networth have been adjusted for amortisation of goodwill arising from acquisitions.
 
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:
* Well-established position in the Indian non-ferrous industry
Hindalco is among the leading players in the domestic non-ferrous industry with close to 43% 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 2019, Hindalco generated 30% of its revenue from sales in export markets. The company should continue to sustain this geographical diversity over the medium term.
 
* Healthy operating efficiency of domestic aluminium operations
Hindalco benefits from a fairly low cost of production for the aluminium operations, with its smelters occupying a first/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 is estimated to have moderated in fiscal 2020 owing to softening of aluminium realisations and operating challenges at its copper smelter. These challenges may continue in fiscal 2021 owing to the Covid-19 pandemic; however, the operating margin may sustain at around 12% over the medium term. Brownfield expansion of its alumina capacities in the current fiscal may further boost profitability.
 
* Product and geographical diversity of Novelis, with stable conversion margin; further strengthened by addition of Aleris
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 London Metal Exchange aluminium prices. Moreover, investment towards enhancing product mix in high-margin automotive segments, and the stable can-body-stock segment have supported growth in operating margin. Focus on increasing recycled aluminium consumption also supports cost structure. Adjusted EBITDA per tonne for Novelis steadily increased to $442 per tonne in the first nine months of fiscal 2020 from $308 per tonne in fiscal 2016. Acquisition of Aleris will further strengthen the product and geographic diversity of Novelis with addition of the high-margin aerospace segment and increased access to Asia-Pacific region.
 
Diversified upstream (Hindalco-India) and downstream (Novelis-Aleris) operations lends high stability of consolidated operating margin, which sustained at 11-12% since fiscal 2017. Intent to expand in downstream aluminium will lend further stability to the consolidated operating profitability.
 
Weaknesses:
* Moderately high leverage
Consolidated net debt to EBITDA improved to 2.6 times in fiscal 2019 from 2.9 times in fiscal 2018. While it is estimated at 2.6 times for fiscal 2020, it is expected to be impacted in fiscal 2021 due to the increased acquisition debt along with decline in profitability. While the net leverage may temporarily increase in fiscal 2021, it is expected to improve to less than 3.0 times by fiscal 2022, backed by reduced capex and expected global recovery post disruption caused by the Covid-19 pandemic; thus, interest coverage and net cash accrual to total debt ratios are expected to sustain at more than 3.0 times and 0.11 time, respectively. Financial flexibilities should remain strong, supported by limited debt maturities over the next two fiscals, strong refinancing ability and healthy cash reserve.
 
* Susceptibility of domestic aluminium business to volatile metal and input commodity prices
The domestic aluminium business remains exposed to any adverse movement in aluminium prices, as witnessed in fiscal 2016. 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 65% of consolidated EBITDA. The same is further strengthened by addition of Aleris.
Liquidity Strong

Cumulative cash accrual is expected at more than Rs 6,000 crore during fiscals 2021 and 2022, against limited repayment obligation of Rs 6 crore and around Rs 300 crore in respective fiscals. Repayments exclude the one year bridge loan facility availed by Novelis to fund the acquisition, as it is expected to be repaid through sale proceeds from divestment of Aleris' plants in Lewisport and Duffel. Liquid investments were more than Rs 14,500 crore (combined for standalone India business and Novelis) as on March 31, 2020. Additionally, Novelis has around USD 1000 million unutilised limit under an asset-backed revolving credit line.

Outlook: Stable

CRISIL believes Hindalco's business will continue to benefit from its well diversified, cost-efficient operations with increasing proportion of downstream conversion capacities. Limited capex requirement and utilisation of free cash flow towards debt reduction will help sustain its financial profile.

Rating Sensitivity factors
Upward factors
* Stronger consolidated profitability margin at over 14% on a sustained basis
* Robust free cash flow generation, leading to sharp improvement in financial leverage
 
Downward factors
* Sustained weakening of profitability margin due to prolonged challenges in aluminium markets
* Sustained increase in net debt to EBITDA ratio to more than 3-3.2 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. 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 in the copper business.
 
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, has been acquired on April 14, 2020 for USD 2.8 billion. It has 13 aluminium rolled products manufacturing plants 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 2020, Hindalco's consolidated reported revenue was Rs 88,826 crore, with EBITDA of Rs 11,363 crore, and net profit of Rs 3,099 crore, as against Rs 96,797 crore, Rs 12,689 crore, and Rs 4,317 crore, respectively, in the corresponding period of the previous fiscal.
 
During calendar year 2019, Aleris' reported revenue was USD 3,376 million, with adjusted EBITDA of USD 388 million, and net loss of USD 12 million, as against USD 3,446 million, USD 276 million, and USD 92 million, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators - Consolidated; CRISIL-adjusted numbers
As on/for the period ended March 31 Unit 2019 2018
Operating income Rs Cr. 1,28,514 1,15,249
PAT* Rs Cr. 3,712 4,300
PAT margins* % 2.9 3.7
Adjusted debt/adjusted networth* Times 1.41 1.47
Interest coverage Times 4.1 3.7
*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)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity
date
Issue size (Rs crore) Rating assigned 
with outlook
INE038A07266 Non-convertible debentures 27-Jun-12 9.55% 27-Jun-22 1400 CRISIL AA/Stable
INE038A07274 Non-convertible debentures 02-Aug-12 9.60% 02-Aug-22 1500 CRISIL AA/Stable
INE038A07258 Non-convertible debentures 25-Apr-12 9.55% 25-Apr-22 3000 CRISIL AA/Stable
INE038A07266 Non-convertible debentures 27-Jun-12 9.55% 27-Jun-22 100 CRISIL AA/Stable
NA Commercial Paper NA NA 7 ' 365 days 900 CRISIL A1+
 
Annexure - List of entities consolidated
Name of the company Type of consolidation Rationale
Novelis Inc. (Consolidated) Full consolidation Significant financial & operational linkages
Utkal Alumina International Ltd. Full consolidation Significant financial & operational linkages
Minerals & Minerals Limited Full consolidation Significant financial & operational linkages
Suvas Holdings Limited Full consolidation Significant financial & operational linkages
Renuka Investments & Finance Limited Full consolidation Significant financial & operational linkages
Dahej Harbour & Infrastructure Limited Full consolidation Significant financial & operational linkages
Lucknow Finance Company Limited Full consolidation Significant financial & operational linkages
Hindalco-Almex Aerospace Limited Full consolidation Significant financial & operational linkages
East Coast Bauxite Mining Company Private Ltd Full consolidation Significant financial & operational linkages
AV Minerals (Netherlands) N.V. Full consolidation Significant financial & operational linkages
AV Metals Inc. Full consolidation Significant financial & operational linkages
Hindalco Do Brasil Industria Comercia De Alumina Ltda Full consolidation Significant financial & operational linkages
Aditya Birla Renewable Subsidiary Limited Equity method Proportionate consolidation
Aditya Birla Science and Technology Company Private Limited Equity method Proportionate consolidation
Hindalco Jan Seva Trust Full consolidation Trust, with significant linkages
Copper Jan Seva Trust Full consolidation Trust, with significant linkages
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  900.00  CRISIL A1+      30-09-19  CRISIL A1+  11-09-18  CRISIL A1+    --  -- 
Non Convertible Debentures  LT  6000.00
23-04-20 
CRISIL AA/Stable      30-09-19  CRISIL AA/Positive  11-09-18  CRISIL AA/Positive  22-08-17  CRISIL AA/Stable  CRISIL AA-/Stable 
                06-08-18  CRISIL AA/Positive  30-06-17  CRISIL AA/Stable   
                19-06-18  CRISIL AA/Positive       
                03-04-18  CRISIL AA/Stable       
Short Term Debt (Including Commercial Paper)  ST              06-08-18  CRISIL A1+  22-08-17  CRISIL A1+  CRISIL A1+ 
                19-06-18  CRISIL A1+  30-06-17  CRISIL A1+   
                03-04-18  CRISIL A1+       
Fund-based Bank Facilities  LT/ST    --    --    --    --  30-06-17  Withdrawal/ Withdrawal  CRISIL AA-/Stable/ CRISIL A1+ 
Non Fund-based Bank Facilities  LT/ST    --    --    --    --  30-06-17  Withdrawal  CRISIL A1+ 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Aluminium Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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