 "Debnarayan Bhattacharya")
Aditya Birla Group's metal giant Hindalco Industries' shares have fallen 42 per cent since January, making shareholders nervous. Thanks to the global fall in commodity prices, Hindalco and subsidiary Novelis lost money in the June quarter. Hindalco managing director Debnarayan Bhattacharya tells Dev Chatterjee the company's diverse product portfolio has served it well in taking on the vagaries of a global commodity price crash. Excerpts:
Global commodity prices are declining sharply and impacting Indian metal companies. Hindalco's shares are down 42 per cent since early this year and investors are nervous. What's your take?
When we were investing in India, we realised that primary aluminium could be exposed to the vagaries of commodity prices. We analysed our portfolio against two important parameters, profit volatility and profit intensity. Very rarely will one find a product that gives high profit and is yet robust in every situation.
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Aluminium is a highly profitable product but is vulnerable to global prices. While aluminium's profit intensity is good, its volatility is also very high. When one goes for large debt-funded projects, you need robust cash flow. Our copper business gives us a robust cash flow and LME (London Metal Exchange) has no impact on its prices. We acquired the copper business from Indo Gulf. You will find copper is delivering quarter after quarter. Our model is such that we get high profitability when the going is good for aluminium and are bolstered by the copper business and Novelis. For Novelis, aluminium is a pass-through. By converting aluminium to products for use in automobiles and in other industries, we attain the revenues and earnings.
Hindalco's net profit is down 67 per cent in the June quarter. Where is the company headed in the next few quarters?
LME prices plus the premium have come down to an unprecedented low level of $1,500 a tonne. The premium has fallen to $90 from $500. There has been a precipitous fall in aluminium prices, which has hurt us. Our earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 1,072 is a great improvement over the corresponding period of last year up 17 per cent. But, due to the very high cost of finance and depreciation, net profit has suffered. It is important to bear in mind that, fundamentally, the business is doing well.
Your subsidiary, Novelis, hasn't delivered a good quarter , with a $60 million loss compared to a profit in the corresponding quarter and lower sales. What traction do you see for the company?
Demand from the automobile sector for Novelis' products has surpassed our expectation. In this quarter (June), auto has grown 68 per cent over last year. Ford is the leader in this segment. I am now waiting for a leading auto company in the US to follow Ford in using aluminium in its cars. If other companies in the US follow, you can imagine the size of the business.
Hindalco invested a lot in getting mines in the government's auction this year. You had recently applied to bid for the Chitarpur coal block. With global coal prices falling consistently, will you still go ahead with these mines?
We need coal for power and our smelters. Global coal prices have certainly dropped and so have Brent crude oil prices. Coal prices are expected to fall further. Companies situated on the coast might benefit by importing cheaper coal. But, most of our units are in the hinterland. And, we would like to have our source of coal. With Coal India increasing production, availability is expected to improve. Coal prices in India will remain subdued, but that does not mean we will not bid for mines in the future. We will continue to bid for our own raw material security, but make a conservative bid, keeping the the low prices in mind. We will take possession of the mines we won earlier in the next few weeks.
Your debt levels have been increasing and that has been impacting profits. How do you plan to manage the debt?
As we increased production from our huge plants in Utkal Alumina and Mahan, we will reap the benefits. As our production increases and revenues rise, the finance cost will come down in the overall costing structure.
