Novelis ready for next scale of expansion: Hindalco MD Satish Pai

Satish Pai, managing director, tells BS about organically-funded expansion at Novelis

With input costs staying high and bullish London Metal Exchange (LME) rates, Aditya Birla Group company Hindalco sees profitability staying flat in the coming quarters. Satish Pai, managing director, tells Aditi Divekar and Dev Chatterjee about organically-funded expansion at Novelis and the company’s focus on growing business to improve stock prices rather than announcing dividends. Edited excerpts:

Hindalco’s input costs moved up significantly in the September quarter, partially offsetting benefits of higher realisation. What is the outlook on input costs for the second half of the fiscal year?

We do not see input costs coming down. In fact, we have factored in 3-4 per cent rise in this cost parameter on quarter-on-quarter basis going ahead. All commodity prices are rising along with LME and aluminium premium. Since oil is above $60 per barrel, inputs costs in the form of furnace oil, coke pitch and caustic are expected to go up. Because of this, even if profit is going up, in percentage terms, there is no change as costs are also going up.
 

Novelis’s performance has been improving. What is the next scale of expansion? Also, can you throw light on talks of buy out of US-based Aleris Corp?

Well, if Aleris Corporation comes to the market, we will take a look at it. But for Novelis, we are focused on organic expansion mainly in the US, China and Asia. In the US, we are planning to set up a 200,000-tonne line in addition to the existing 300,000-tonne capacity. We are currently evaluating the plan. We will be funding our expansions organically.

Shareholders were unhappy at the annual general meeting with Rs 1.10 a share dividend for FY17. Now that you are generating cash at both Novelis and Hindalco (standalone), will dividends go up?

Novelis and Hindalco are generating equal amount of cash, which is about $400 million and Rs 2,500 crore annually, respectively. The dividend is certainly not in our mind. The best is to use the generated cash in growing the stock price and that is what we plan to do. Novelis will make further investment in the business from the generated cash. Also, in terms of debt, we are in a comfortable position now with a consolidated net debt at Rs 44,000 crore and standalone at Rs 18,605 crore.

What is the domestic demand outlook for aluminium. Do you continue to face threat from cheap imports?

In the first half of the year, on a year-on-year basis, growth in aluminium demand has just been 2 per cent, and in copper there is a de-growth. The monsoon and the first quarter after the goods and services tax (GST) have impacted the market, but we are hoping that demand will be strong in third and fourth quarter. Normally, we see a 7-8 per cent demand growth annually. Now, in the second half itself we should get about 9-10 per cent growth to make up for the loss. We are in touch with all our customers and are waiting for infrastructure spending to pick up and affordable housing to go up. 

Import threat still remains from countries that have zero free-trade agreements like Japan for copper and South Korea and Malaysia for aluminium. If China gives subsidies, then exports from the country will go up but I do not think China wants trade wars at present. 

At Hindalco, after the GST, you said the logistics cost would come down significantly. What is the impact of the GST on logistics cost?

It is too early to see a drop in logistics cost at Hindalco. But work is on and we are reducing our godowns by half in the next few months from 44-45 at present. Also, we are working out contracts with large truck companies to bring down the costs. We intend to shift the entire metal transport via rail from road and have also started sending materials like sulphuric acid and copper gypsum through the sea. Waterways is a new avenue opened for us and we will strengthen this. Currently, the cargo is sent through waterways on a one-off basis.