Detailed Rationale

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

 

The rating reflects strong operating performance in the first nine months of fiscal 2024, driven by healthy demand for aluminium, robust prices despite a slight decline and moderation in input cost especially energy. The rating also factors in the diversified product mix and well-defined capital allocation approach. Healthy operating performance led to sufficient cash accrual (reported consolidated earnings before interest, tax, depreciation and amortisation (Ebitda) of around Rs 18,500 crore during the same period), and a comfortable financial risk profile: consolidated net debt (including supplier’s credit and unfunded pension obligation) to Ebitda ratio was around 1.9 times as on December 31, 2023 (1.9 times as on March 31, 2023, and 1.6 times as on March 31, 2022).

 

The rating also factors in the continued strong resilience in operations of Hindalco’s subsidiary, Novelis Inc (Novelis, rated ‘BB/Negative’ by S&P Global Ratings), the high cost efficiency in domestic operations,  and increased focus on downstream capacities at Hindalco and Novelis, which should ensure a healthy operating cash flow at a consolidated level over the medium term. Backed by strong operating cash generation, the company prepaid Rs 4,370 crore of domestic debt during the first nine months of fiscal 2024, which supported the capital structure.

 

While profitability in the domestic aluminium business remains exposed to volatility in London Metal Exchange (LME) aluminium prices, the conversion nature of large downstream operations at Novelis (with consolidated Ebitda share of over 55%) lends stability to aggregate profitability.

 

That said, aluminium prices have reduced to around USD 2,200 per tonne in the third quarter of fiscal 2024, from more than USD 2,500 per tonne for fiscal 2023, amid global macro headwinds and moderation in production and demand in China. Growth in aluminium demand globally is estimated to have moderated to 0.5-1% in calendar year (CY) 2023 (after witnessing robust growth of over 6% in CY2021). Growth is expected to improve to 2-3% with expected better demand from China, led by electric vehicles and the renewable energy sector. Lower inventory on the back of limited supply additions and high energy cost will support prices over the medium term.

 

Aluminium prices are likely to remain around USD 2,400 per tonne through fiscal 2025, still higher than levels seen prior to 2022. This, along with cost efficiency of the domestic aluminium business and the stable converter business of Novelis, should support the operating profitability of Hindalco. Consolidated Ebitda is likely to lie in the range of Rs 25,000-27,000 crore in fiscal 2025 (Rs 23,600 crore in fiscal 2023 and Rs 26,000-26,500 crore projected in fiscal 2024). Any significant decline in global demand, impacting sales volume of the company, and sharp fall in aluminium prices will be a key monitorable.

 

CRISIL Ratings has taken note of the announcement made by Novelis for an increase in cost of its ongoing greenfield Bay minette expansion project by around 65% (from USD 2.5 Billion to USD 4.1 Billion) and  extension in commissioning timelines of the project by an year, with completion timeline revised to the second half of fiscal 2027. The said increase in project cost may lead to a shortfall of USD 1.2-1.5 billion against the operating cash accrual of Novelis over the same period.

 

However, the ratings continue to factor in strong liquidity of Hindalco and Novelis, and the proven fund-raising ability of Novelis to meet any cash flow shortfall for the project in a timely manner. Also, despite the likely increase in project cost, consolidated capital structure of Hindalco will not be materially impacted, with net leverage remaining comfortably below 2.5 times over the medium term. Further, against the no major consolidated debt obligations during fiscal 2025, the company had outstanding consolidated cash & cash equivalents of around Rs 18000 crore as on December 31, 2023.

 

The company plans to ramp up its organic growth capital expenditure (capex) totaling around USD 10 billion (earlier around USD 8 billion) over the medium term, and fund the same via healthy consolidated annual cash accrual, thus ensuring limited reliance on debt. Of the total capex, around USD 6.3 billion is likely to be incurred till fiscal 2025 (earlier USD 4.8 billion), while the balance of around USD 3-3.4 billion is under appraisal. However, as per the capital allocation approach, capex plans are to be primarily funded via internal accrual. Further, there remains flexibility towards uncommitted capex. That said, with expectation of increase in consolidated debt due to expected shortfall in operating cash against the ongoing capex due to increase in project cost of Novelis. Hence, consolidated net leverage (including supplier’s credit and unfunded pension obligation) may exceed 2.0 times but sustain comfortably below 2.5 times over the medium term.

 

Further, CRISIL Ratings has also taken note of the proposed listing of Novelis by the ultimate parent (Hindalco), with the US Securities and Exchange Commission (SEC). While the process has been initiated, it is in initial stages and necessary regulatory approvals are awaited. Further, CRISIL Ratings understands that in case of successful listing, Novelis will not receive any cash from the said listing proceeds. Also, the listing may not cause any dilution in the majority stake held by Hindalco in Novelis. However, further developments on the said front will be key rating monitorables.

 

The rating reflects the strong 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.

*Adjusted debt/EBIDTA, wherein adjusted debt is net of 90% of cash and cash equivalents 

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.

 

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 the post-retirement benefit obligation for Novelis and supplier’s credit at consolidated level.

 

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: Hindalco is one of 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 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, and thereby diversify its revenue mix. In fiscal 2023, Hindalco generated around 20% of its revenue from exports. Geographical diversity in revenue should 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 the 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 linkages from Coal India Ltd and operational captive coal blocks. Coal security for the domestic business is further supported by the Chakala mine (reserves of around 50 MT, acquired in fiscal 2021) and Meenakshi mine (reserves of 286 MT, acquired in fiscal 2022). These mines should operationalise over the next two fiscals, and thus, enable the company to meet more than 90% of its coal requirement internally. The operating margin has been healthy despite moderation in aluminum prices due to lower input cost and integrated operations, supported by steady demand. The margin is expected to remain range bound at 12-14% with reduction in prices and  material cost. 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 2024) 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 better access to the Asia-Pacific region. Adjusted Ebitda per tonne increased steadily to around USD 500 per tonne in the first nine months of fiscal 2024 (ended December 31, 2023) from USD 478 per tonne in fiscal 2023. It is further expected to improve to USD 525 per tonne, led by the improved sales mix and inclination towards the can and auto segments. Contribution of Novelis to consolidated profitability was over 60% for fiscals 2022 and 2023 and more than 55% in the nine months fiscal 2024.

 

The company’s strategy to expand in downstream aluminium, along with 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 16,000 crore in fiscal 2023, thereby reducing consolidated net debt (including unfunded pension obligation) to Rs 45,168 crore as on March 31, 2023, from 47,897 crore in the previous fiscal. Net leverage (including unfunded pension obligation) and interest coverage ratio were steady around 1.9 times and 5.9 times, respectively, in fiscal 2023, as against around 1.6 times and 5.6 times, respectively, in fiscal 2022, despite large capex of around Rs 16,000 crore. Further, with high prepayment of Rs 4,370 crore in the domestic business in fiscal 2024, leverage levels may remain at the same level, supported by strong net cash accrual of Rs 17,000-18,000 crore.

 

Going forward, with expected increase in capex (to be funded through internal accrual), net debt may remain stable. However, with expected moderation in EBITDA, net leverage may increase from levels of fiscal 2022 in the short term, yet sustain comfortably at 2.3-2.5 times 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 remains exposed to sharp fluctuation in aluminium prices, as witnessed in fiscal 2016 and the first-half of fiscals 2021 and 2023. Operating margin is susceptible to increase in prices of raw material (coal, coke, and pitch), which the company may not be able to completely pass on to customers. While coal linkage security has increased and may improve further over the medium term, it remains susceptible to a hike in prices by Coal India Ltd, 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 65% to the consolidated Ebitda.

Liquidity: Strong

Consolidated annual cash accrual (post-dividend) of Rs 17,000-18,000 crore is expected during fiscals 2024 and 2025, against planned capex of Rs 16,000 crore and Rs 24,000 crore, respectively, and minimal scheduled term debt. Furthermore, consolidated liquid investments were around Rs 18,000 crore as on December 31, 2023. Consolidated liquidity is also 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 the aluminium business of Hindalco, along with Novelis.

 

CRISIL Ratings believes the ESG profile of Hindalco 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 because its nature of operations affects the local community and involves health hazards.

 

Key ESG highlights:

• The board-level sustainable committee, chaired by the managing director, meets periodically to monitor performance and discuss areas of improvement.
• A task force has been set up at the plant level to work on initiatives related to energy, water, waste, and air quality management. Energy-intensive operations have prompted Hindalco to focus especially on adopting efficient ways of using energy.
• Share of renewable energy contribution in the portfolio, rose to 108 megawatt (MW) in fiscal 2023, from 100 MW in fiscal 2022. The company also plans to add 100-300 MW of pumped hydro renewable hybrid capacities through a third party in fiscal 2025.
• Hindalco aims to become carbon neutral and water positive in all mining locations and reduce its net loss on biodiversity to nil by 2050.
• The loss-time injury frequency rate of 0.25 in fiscal 2023 (0.28 in fiscal 2022) is among the lowest in the industry.
• 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, a 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

Downward 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.
• Significantly higher-than-expected debt funded capex resulting in material dilution in capital structure and weakening in liquidity profile of the company.

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% step-down 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	2023	2022
Operating income	Rs.Crore	223,482	195,351
PAT*	Rs.Crore	10,097	13,730
PAT margin*	%	4.5	7.0
Adjusted debt/adjusted networth*	Times	1.0	1.4
Interest coverage	Times	5.93	5.61

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

Any other information: Not Applicable