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Ladies and gentlemen, good day, and welcome to Hindalco Industries FY '23 First Quarter Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to hand the conference over to Mr. Subir Sen, Head of Investor Relations of Hindalco. Thank you, and over to you, sir.
Thank you, and a very good afternoon or morning, everyone. On behalf of Hindalco Industries, I welcome you all to the earnings call for the first quarter of financial year '23. In this call, we'll refer to the Q1 FY '23 investor presentation available on our company's website. Some of the information on this call may be forward-looking in nature and is covered by the safe harbor language on Slide #2 of the said presentation. In this presentation, we have covered the key highlights of all the businesses for the first quarter of financial year '23, and a segment-wise comparative financial analysis of aluminum and copper businesses in India, and our overseas subsidiary, Novelis. Please note, in this quarter's results, we have presented our aluminum upstream and downstream financial and operational performances separately to fully reflect the individual business segment performances. The corresponding segment information of the prior periods have been restated accordingly for a comparative analysis. We have with us on this call from Hindalco's management, Mr. Satish Pai, Managing Director; and Mr. Praveen Maheshwari, Chief Financial Officer. From Novelis' management, we have Mr. Steve Fisher, President and CEO; and Mr. Dev Ahuja, Chief Financial Officer. Following this presentation, this call will be open to any questions you may have. Both this call and audio replay of this call will be available on our company's website. Now let me turn this call to Satish.
Thank you, Subir. Very good afternoon and morning, everyone. Thank you for joining today's conference call of Hindalco's earnings for the first quarter of FY '23. Let me now start with our progress in this quarter across various sustainability metrics on Slide 5 and 6. On the environment front, with our continuous focus on waste, water emissions and green belt biodiversity, we have achieved 96% of total recycling and reusing of waste, 136% bauxite residue utilization at 3 out of our 4 alumina refineries this quarter. Utkal Alumina refinery is conducting 2 pilot pits to reuse bauxite residue backfilling of mines, and construction of roads, of which Pit 1 is ready and Pit 2 is under construction. On fly ash recycling, I'm very happy to inform you that we have now attained 116% of fly ash recycling at the end of the first quarter of FY '23, which means that we are now recycling beyond what we generated, and are sending to cement in other industry. We have now received the single-use plastic free certification for 8 of our sites, and are continuously working to attain this for the rest of our locations. On water management, we are committed to zero liquid discharge at all our sites and 20% reduction in specific water consumption by 2025 from the base year of FY '19. We are working on several fronts such as increasing rainwater harvesting through our CSR activity, reducing the consumption of fresh water and ensuring zero liquid discharge at all our facilities. In Q1 of FY '23, we have developed an innovative modular STP sewage treatment plant at Taloja and Alupuram downstream facilities. Our recycling of water across facilities was up 5% this quarter on a year-on-year basis. We are on our way to achieving net water positivity by 2050. On green cover and biodiversity in line with the IUCN guidelines, we are implementing biodiversity management plans at all our plants and mines. We'll be further implementing green belt at all our sites. We have cultivated Miyawaki patches that are Renusagar, Renukoot, Mahan and Aditya facilities. Utkal Alumina is now piloting the charging of biomass to substitute coal in our power plant. This biomass charging is also being implemented in Hirakud, Mahan and Renusagar facilities. Coming to the renewable energy and safety slide -- updates on Slide 6. We are targeting to reach a total of 300 megawatts of renewables, with 200 megawatts being without storage with solar and wind, and another 100 megawatts with storage by the end of FY 2025. Of this, we have already achieved 100 megawatts at the end of FY '22. This year, in FY '23, a total of 109 megawatts of renewable projects are planned of wind, renewable hybrid, biomass et cetera. Another approximately 67 megawatts of renewable projects are under execution, and finalization in hybrid and solar, that had to be executed over the next 3 years. We are also working on large-scale renewable hybrid project with a third-party and Pumped Hydro, which can provide up to 100 to 300 megawatts to our Aditya plant with connectivity to a 400 KV Grid. This is expected to be completed by December of 2023. The aluminum-specific GHG emissions were recorded at 78.4% in Q1 FY '23 from the base year of FY'12. On safety, we are committed to Zero Harm, and have been continuously upgrading our safety program and systems to meet international standards, to provide a safe environment for each of our employees and contract workers across all our locations. LTIFR was recorded at 0.43 in Q1 FY '23. There was one fatality of a contract worker recorded at our Indian operations this quarter. Coming to Slide 8 on the key highlights of our performance in Q1 FY '23, starting with our consolidated performance. We delivered a record quarterly performance supported by thrust on operational efficiencies and a robust performance of copper and downstream businesses, despite rising input costs and inflationary pressures. EBITDA stood at a record INR 8,640 crores up 27% year-on-year. Quarterly consolidated PAT for continuing operations was at a record INR 4,119 crores, up 27% year-on-year compared to INR 3,254 crores in the corresponding period last year. Hindalco continues to maintain a strong treasury balance of around $1.04 billion in Novelis, and INR 13,580 crores in India at the end of June '22. Net debt-to-EBITDA continues to remain well below 2x at the end of June '22 at 1.40x versus 2.36x at the end of June '21. As far as our business performance this quarter, starting with Novelis, EBITDA stood at record $561 million, up 1% on account of higher product pricing, favorable product mix and higher recycling benefits. EBITDA per ton this quarter was a record $583 per ton versus $570 in Q1 FY '22, up to 2% year-on-year. Net income from continuing operations was recorded at $307 million this quarter versus $303 million in the corresponding period last year. Novelis quarterly shipments in Q1 FY '23 stood at 962 Kt in Q1 FY '23 versus 973 Kt in the corresponding quarter of last year, lower by 1% year-on-year due to impact of supply chain disruption in the quarter. Moving to Slide 9, Hindalco's India aluminum business performance. This time we have segregated our aluminum upstream and downstream businesses to give you a more clear picture of our performance. Our upstream aluminum EBITDA stood at INR 3,270 crores up 45% year-on-year on account of favorable macros, higher volumes and better operational efficiency, despite the rising input costs. In this quarter, EBITDA per ton was up 32% year-on-year at $1,274 per ton versus $966 per ton in the corresponding period of last year. EBITDA margin was at 38%, and continues to be one of the best in the industry. The overall shipments of primary aluminum were up 2% at 333 Kt in Q1 FY '23 versus 325 Kt last year. Of this, third-party shipments was 245 kt and 88 Kt was transferred to the downstream business. An additional Utkal Alumina 350 Kt expansion via debottlenecking is progressing, and expected to be commissioned by next year. Our downstream aluminum EBITDA stood at INR 158 crores, up 305% year-on-year on account for better pricing this quarter versus the comparative quarter last year. EBITDA per ton was up 306% year-on-year at $261 per ton versus $64 per ton in the corresponding period of last year. The overall sales of downstream value-added products that include a FRP, foils and extrusions, this quarter was 5% lower year-on-year at 78 Kt versus 82 Kt last year. This was mainly due to supply chain logistics constraints in this quarter. I'm happy to announce that Hindalco has signed an MOU with Phinergy, a leading Israel-based pioneer in metal-air battery technology, and IOC Phinergy Private Limited to develop aluminum-air batteries for electric vehicles. This is a significant step towards decarbonizing mobility, while reducing dependence on battery imports in the country, and boosting Atmanirbhar Bharat by enhancing energy security. Turning to the quarterly performance of the copper business. Our cathode production this quarter was at 92 kt, up 47% year-on-year, while the CC Rods production was at 79 kt, up 80% year-on-year. Total copper metal sales were at 101 Kt, up 26% year-on-year, while copper rod sales were at a record 80 Kt, up 73% year-on-year, in line with market demand. Copper EBITDA was at a record INR 565 crores this quarter, up 116% year-on-year on the back of higher volumes, better operational efficiencies and improved by-product realization. Coming to the broader economic environment on Slide 11. Global economic growth momentum is currently slowing down due to aggressive monetary tightening and spillovers from the Russia-Ukraine war. IMF expects the global growth to moderate to 3.2% year-on-year in calendar year '22 from a post-pandemic rebound of 6.1% in calendar year '21, highlighting risk to the downside. Latest PMI readings are at a 2-year low indicating considerable slowdown in developed markets, that is United States, Eurozone, U.K., Japan, and slow pace of expansion in China amplifying recession fears. The global inflation is expected to stay elevated for longer, owing to firm food prices and energy prices, and lingering supply/demand imbalances. With 2/3 of the world suffering from an inflation of over 7%, aggressive monetary policy tightening is expected to continue in the second half of this year as well. IMF expects inflation to be an average of 6.6% in advanced economy and 9.5% in emerging and developing economies in calendar year 2022. However, high-frequency data also suggests easing inflation rates on an average across the globe, as cost pressures and selling price inflation is owing to some improvement in supply side constraints and a weaker demand. Resilient emerging market performance and a recovering service sector performance remained as a silver lining amidst an uncertain outlook. Despite global headwinds, Indian economy is showing resilience. While high-frequency economic indicators have been mixed latest the amount GST data on the back of a solid core sector output growth, point towards robust economic momentum. Strong rebound in services, pick up in manufacturing activity, uptick in government CapEx, stabilization of inflation pressure, buffers in the form of adequate international returns, and a sound financial system that kept the Indian economy on a firm footing. The RBI projects India's FY '23 GDP growth at 7.2% year-on-year. Inflation continues to be above RBI's upper dollar level of 6% for 6 consecutive months. Though elevated inflation seems to be on the back book for now, with headline CPI is leasing for the second month in a row on the back of moderation and commodity prices, and some easing of supply side pressure. In the backdrop of elevated inflation levels and tighter global financial conditions, RBI has hiked rates at 50 bps in August, taking the cumulative hike to 140 bps in FY '23. The Central Bank projects inflation of 6.7% in FY '22, so that is above tolerance level of 6%. Let me now take you through the aluminum industry overview on Slide 12 and 13. In the first half of calendar year '22, the global aluminum production grew 1% year-on-year to around 34.1 million tonnes, while global consumption growth was flattish year-on-year at 34.3 million tonnes. Hence, the global market balance was in a marginal deficit of 0.2 million tonnes. Talking specifically on regions, the Chinese production increased in Yunnan, in Mongolia and Hanam. However, the overall production in China increased by 1% year-on-year to 19.7 million tonnes. The consumption -- however, the consumption phase headwinds due to the zero COVID policy relating to the lockdowns in China, which impacted consumption of aluminum across all sectors. Consequently, consumption in China declined by 2% year-on-year to 19.5 million tonnes, leading to a slight surplus of 0.2 million tonnes in Chinese metal balance in the first half. In the rest of the world, production of aluminum in the first half of calendar year '23 grew in the Middle East, but production declined sharply in the European region due to energy prices. The overall production in the rest of the world increased 1% year-on-year to around 14.4 million tonnes. In this period, the consumption growth for the rest of the world was supported by a strong demand in the packaging segment, which led to a growth of 4% year-on-year at 14.9 million tonnes in the first half of calendar year '22. As is the result, the rest of the world reported a deficit of around 0.4 million tonnes in the metal balance in H1 calendar year '22. On a quarterly basis, in Q2, the global aluminum production increased by 2% to around 17.3 million tonnes, while the consumption declined by 2% to around 17.3 million tonnes, resulting in a balanced market in this quarter. In the same period, Chinese aluminum production grew sharply by 4% to around 10.1 million tonnes, led by a significant increase in production at the Yunnan province. In Q2 calendar year '22, the consumption degrew sharply by 7% due to zero COVID policy in China at 10 million tonnes, resulting in a balanced market in China. In the rest of the world, there were some disruptions in the production in the European region on account of rising gas prices due to the ongoing war. However, in regions like Middle East, increase in production led to an overall production in the rest of the world that grew by 1% to around 7.3 million tonnes in Q2 calendar year '22. Despite headwinds in consumption in the rest of the world, the overall consumption also improved by 3% year-on-year, also reaching 7.3 million tonnes in Q2 calendar year '22, leading to a balanced market on a year-on-year basis. The global aluminum prices on an average have declined from $3,280 per ton in Q1 calendar year '22 to $2,882 per ton in quarter 2, and it continues to fall reaching $2,400 per ton currently. This fall in aluminum prices is led by worries about recession, a weaker Chinese demand, and a hawkish monetary policy. On Slide 13, domestic demand of aluminum in Q1 of FY '23 is expected to reach 1.06 million tonnes, reflecting 11% year-on-year growth. However, in the corresponding period, the domestic consumption was impacted by the second wave of the pandemic in 2021. On a sequential basis in Q1 FY '22, there was a marginal degrowth of 3% compared to the previous quarter. As per [ Ciaz ], automotive production in Q1 FY '23 increased by 5% sequentially, which reflects as a positive indicator for the industry segment. Domestic demand in terms of government infrastructure is stable, while packaging demand remains steady. However, some headwinds are seen in the Building and Construction segment due to the rising interest rates by the RBI. On an overall basis, with record vaccination and supportive government policies like PLI scheme, domestic aluminum demand is expected to remain strong. Moving to Slide 14. The global FRP demand is expected to grow by 6% in calendar year '22 versus 10% growth in calendar year '21. The market demand for recession-resistant beverage can sheet is expected to grow by around 5% in calendar year '22, driven by stable and strong demand, as consumer preference for sustainable packaging options continues to rise, driven by package mix shift towards more infinite use of recyclable aluminum. The automotive segment is estimated to grow at 10% in calendar year '22. This growth is led by elevated levels of pent-up demand, supported by growing consumer demand for vehicles at use, and higher share of aluminum like SUVs, trucks and electric vehicles. However, in the near term, continued semiconductor shortages are impacting the automotive industry, though some easing is currently visible. The demand in specialty segment is expected to grow by 4% in calendar year '22 with the near-term order book remaining strong, including consumer electronics, container foil packaging, EV battery [indiscernible] et cetera. The aerospace segment is expected to grow around 30% in calendar year '22, as the order bookings continue to improve with the resumption of air travel and is expected to be back to pre-pandemic levels by fiscal year end. In Q1 of FY '23, domestic FRP demand is expected to grow in double digits by 14% year-on-year due to the base effect. Demand remains strong in the packaging sector. The B&C demand also improved due to stable government projects. Automotive demand was stable with sharp increase in production and with a greater focus on localization. Demand is likely to grow in quarter 2 of FY '23 due to stable demand in packaging, consumer durable and B&C. Turning to the copper industry on Slide 15. In H1, calendar year '22, global production of copper grew by 1.6% year-on-year and consumption grew by 1.3% on a yearly basis. Chinese production of copper declined marginally by 1.9% year-on-year, where consummation grew marginally by 0.6% year-on-year in the same period. In the world excluding China, copper production increased by 4.3% year-on-year, whereas the consumption grew around 2% year-on-year. On a quarterly basis, in Q2 of calendar year '22, global production of copper declined by 2.5% year-on-year, whereas the consumption grew by 1.6% year-on-year compared to the corresponding period last year. Chinese production of copper decreased by 8% year-on-year, while consumption growth was flattish on a year-on-year basis. In the rest of the world, excluding China, production increased by 2.8% year-on-year, whereas consumption grew by 3.6% on a yearly basis in Q2 of calendar year '21. During the first part of Q1 FY '23, April and May '22, the spot TC/RC was close to 17.0 cents per pound due to the lower demand of copper concentrate by Chinese smelters on account of the smelter disruption and maintenance in this period. The mine disruptions from Peru combined with the restarting of many of the Chinese smelters led to the tightening of the market during June-July 22, resulting in a drop in spot TC/RC to the current level of around $0.18 per pound. The TC/RC is expected to be range bound at current levels to Q4 of calendar year '22, until the availability of copper concentrate from new mines in Peru and Chile that are being commissioned, that help the TC/RC move up again. Coming to Slide 14 on the domestic side of copper demand. The overall demand increased by nearly 47% year-on-year at 173 Kt in Q1 FY '23. Imports declined by around 25% year-on-year at 33 Kt in Q1 of FY '23. On a quarter-on-quarter basis, market demand increased marginally by 0.7% year-on-year, while imports remained stable to a marginal increase of 0.5% year-on-year in Q1 FY '23, the trend of operational and financial performance for each of our business segments this quarter, and that is the corresponding period of last year I'll cover in further slides, and annexures to this presentation. Let me now conclude today's presentation with our strategic priorities for this year on Slide 13. Cost optimization will be a key focus. We successfully delivered based on this another consistent overall performance in the first quarter of fiscal 2023. Although rising input costs and inflationary challenges continue to put pressure on us. On this slide, let me share with you our strategy priorities to provide the glimpse of our overall focus for this fiscal year. Our top most priority is maintaining our robust capital structure with the focus on our capital allocation framework, a strong balance sheet, to fuel our next phase of organic growth, and our continued emphasis on shareholder returns. Our next priority will be our value-enhancing growth directed towards expanding capacities in various business segments, and diversifying our portfolio to provide not only products but solutions, while expanding downstream businesses in both aluminum and copper organically. Next is our focus of approach on the 2050 years key commitment by taking sustainability initiatives across the value chain and aiming to become the industry leader in sustainability. Last but not the least, our portfolio enrichment strategy of advancing from a manufacturing company to manufacturing solutions provider with an enriched product mix with a higher share of high-end value-added products across segments and end markets. Thank you very much for your attention, and the forum is now open to any questions you have.
[Operator Instructions] We have a first question from the line of Indrajit from CLSA.
Couple of questions. First on Novelis. We have seen the commentary by Paul [ Cob ] last week where they have kind of sounded a warning on the demand side on beverage can. Now this is one segment which has been very strong over the past few quarters. So what has changed suddenly? And do you think by extension we could see more such demand volumes or capacities being shut?
Steve?
Yes. So, as we said on our call last week, we continue to see very strong demand for beverage packaging. Our growth projections have been consistently 4%, and that's kind of the near-term and long-term growth that we see in this business. If you look at some of the customer or can makers' comments in their earnings calls, which you can go back and look at the transcripts, specifically Ball has stayed at a 4% to 6% growth rate in the near term. And I believe the 4% to 6% growth rate for Ball is their long-term growth rate previously as well. So I think where they saw some more near-term demand for their business, that pull back. But we continue to see the growth at the 4%, which is on the conservative side of, I think, all of the can makers' projections for North America. So we continue to see the long-term trends associated with the conversion of infinitely recyclable aluminum packaging, taking share, and feel very, very comfortable about the continued growth in this marketplace and the investments that we're making specifically in the North American marketplace as well.
My second question is on the India aluminum business. So versus our guidance in last quarter, what kind of cost of production inflation have you seen in this quarter? And what would be the guidance for the following quarters?
Yes. So that's a good question. So we saw roughly a 17% increase in our cost of production in Q1 versus Q4. And I think that probably Q2 is going to be the -- in some ways, our worst quarter from a cost of production point of view because the majority of the coal problems and the high-cost coal that we had to buy during May and June, will get consumed in Q2. So we are expecting in Q2 another high teens increase in the cost of production. So I -- after that -- just to sort of continue the story because the coal has been the biggest impact on our cost of production. We have already started to see post monsoon and heat going down the coal linkage. Coal supply is starting to increase. So we think that Q3 and Q4 will start to get better. But Q4 is going to be the -- sort of from a cost of production point of view, the highest quarter product.
We have a next question from the line of Sumangal Nevatia with Kotak Securities.
Congratulations on the quarter. First question is just an extension of previous question on the cost, Mr. Pai. So, is it possible to share how is the coal mix in 1Q, 2Q, where we're seeing a lot of inflation, and how is it changing in 3Q, 4Q? And this 17% increase for some reason we are not able to reconcile in our numbers. So is it just a full cost increase? And would you see some other cost tailwinds in 1Q? Because the cost increase on our numbers is much, much lower than the 17% what you said.
Yes. So first let me answer the whole question. So what basically happened is that, when the government prioritized the IT fees for power sector, they reduced the amount of linkage coal that we will get. We first went to the 75% of [ cap ] and at one point went down 65%, which meant that we had to buy coal on the auction market. And hence, the premium in the auction market went up to nearly 500%. So if you look at Q1, our linkage coal was only 50%, whereas the auction coal was 31%. Now the projections for Q2 are still in the same ball part. But towards the -- let's say, now in August and September, the linkage coal is going up. So in Q3, we should get back to more of a 60%-65% linkage coal, and hopefully, in Q4, we are back to a higher percentage. So that is the progression of coal which is impacting our cost of production. Now, Sumangal, overall cost of production this quarter you are not able to reconcile, I understand, because some of it is also because of our inventory position. We had certain low-cost inventories that got transferred over to Q1. So some tailwinds were there from that as well.
And sir, the remaining 20% is imports, right in our mix?
So total cost increase was 70% in coal. Are you asking about coal?
Yes, I'm asking about coal. So linkage e-auction 50-30 and remaining 20% is imports, right?
So own mines and imports. Remember we have -- and of course, as you know, even the import cost has gone through the roof. So, own mines and imports is 20%. You're right.
Sir, second question is with respect to the copper business. I mean, we saw this record EBITDA this quarter. Is it possible to just explain what are the drivers? And how much is it sustainable? I mean, should we now build in north of INR 500 crores quarterly EBITDA, or this is like a one quarter?
I wouldn't say it's one-off. I still think that we're going to have sort of INR 400 crores plus quarters now. The strong performance was also because sulphuric acid prices were very strong, as well as the gold -- as the beauty went up, we benefited. So as a combination, we had a good operational performance, good CC Rod sales, capital sales, combined with high sulphuric acid prices and precious metals, gave us this strong quarter.
And just one last question, if I may squeeze in, more of a big picture question. Novelis, as we know, I mean, the business -- the noncyclical model of the business still appears a bit underappreciated. Is it possible to share, I mean, what are your thoughts on a separate listing of Novelis in U.S.? Just some broad level thoughts, and how should we expect in the coming years?
So, Sumangal, we always look for opportunities to increase shareholder value.
Sir, do you view separate listing as an opportunity to unlock some value?
We always consider all possible avenues to increase shareholder value. I think that's core.
We have next question from the line of Pinakin Parekh with JPMorgan.
Now when the CapEx plan was announced back in March, there were a few projects which were under appraisal. At this point of time, sir, can you give us the status of those under appraisal projects, have they progressed? And what is the visibility of the consolidated CapEx for this year and next year?
So, let me start with the CapEx number. So we had guided that this year, our CapEx plans were around INR 3,000 crores. We have no change to this year's CapEx plan. Though I think because of the rate at which we'll be able to spend because most of the suppliers are all tied up, the actual cash out may be more like INR 2,500 crores. But this year's CapEx plans, mostly which were heavily weighted towards the downstream expansion in Aditya, finishing of Silvassa extrusion, doing the 350 Kt expansion brownfield of the Utkal Alumina, all those are progressing quite well. Now the under-expansion projects that you talk about, the downstream ones actually are progressing quite fast. The 2 upstream ones, one was Alumina and one was the aluminum port expansion. The Alumina one, we are still waiting for the bauxite mine options to come, and we think that, that will come first. The aluminum smelter expansion continues to remain under appraisal.
And sir, the quarter-on-quarter increase in debt, is it all translation? Or has there been any other issue as well?
No. So, in the -- first quarter, typically is a quarter where working capital block is generally higher. In case of Novelis, it's been higher LME as well which has contributed to this. In case of copper, it is also because at the end of March we had the smelter shutdowns, so there was some kind of a refilling there. But yes -- and in case of Aluminum India, it's because the higher input cost which actually goes largely into our working capital, that has contributed there. So we will see some of this coming off again in Q2, and that pressure will get released.
But is it fair to say that broadly, the company believes this to be plus/minus 10% as the steady net debt? Or would you expect this to even structurally come down more over the next few quarters?
No. So you're talking about the working capital losses or overall debt?
Overall net debt sir.
Overall net debt will always continue to come down if not the same. It will not go up. That is for sure, because we are very focused on the leverage. Both in Novelis and in India, there's a very strong focus. So net debt will not go up definitely. There may be fluctuations between quarter-to-quarter based on working capital fluctuations. But long-term debt, we are not planning to increase at all.
And in the next few quarters, that the LME has come down, we'll see some working capital releases as well. So that's it.
And since you talked about debt, it will be good to mention here that in India, we had INR 6,000 crores of bonds, which was the most expensive bonds so far at a cost of 9.55% and 9.60%. Those have been fully repaid between Q1 and Q2. So that gross debt will definitely come down. In March 31st, we had a INR 2,500 crores borrowing in Hindalco of a long-term nature, which was in view of INR 2,500 crores repayment that we are making in Q2 of the current quarter. So these are the changes in the long-term loans. So effectively, between February to now, we are bringing down the gross debt -- gross long-term debt by INR 6,000 crores, which is the most expensive debt also in Hindalco. So that should actually help us in reducing our interest burden significantly going forward.
We have next question from the line of Satyadeep Jain with AMBIT Capital.
Thank you management for providing all the details on India downstream business. A couple of questions on that one only. Pretty impressive performance on margins in that business compared to what we saw historically for that business. Is it possible to provide more det ails on what is the recycling mix in India? And what is the forex mix? And what actually led to -- was it an annual pricing reset for -- or maybe some of these contracts expiring, and are you getting higher pricing for these contracts in domestic business? Or was it also more of export opportunities for this business? That's the first question on that business.
Yes. I think that this is a result of the last few years. We have been always talking to you, but we have not actually come and split it out. So, over the last 3 or 4 years, we have exited the bottom end. We have improved the quality, focused on segments that are more profitable. And this has been combined with a big market price that has been achieved over the last year. So, as a combination of all of that and the focus on operations, quality, et cetera, we are now in good market segments that have got good EBITDA per ton. So, I actually believe this is INR 260 crores will head more towards INR 275 crores and INR 300 crores in the coming quarters.
And what's the recycling mix for you in India?
Very little. In fact, that's why it's running at this INR 275-odd crores because the recycling portion is very, very little. We are only doing what we call runaround scrap and no sort of post-consumer scrap yet that -- we are starting to work on those projects now. So very little scrap benefits in the India EBITDA per ton.
Second question was tied to the downstream expansion you're looking in India at Aditya Hirakud. Is there -- I think -- I believe you already have excess hot mill capacity there, and you're looking at only adding coal mill. And is that also largely tied to export markets? And are you looking at any particular split between auto, cans, oil, any other product mix you're looking at?
So we have a product mix, but you're right, we have excess hot mill in Hirakud. So it's a coal mill and finishing line. And the mix is going to be -- can point stock what we call hard alloys, et cetera.
We have next question from the line of Amit from Edelweiss.
So, my question is that -- there are 2 questions that I have. The first one is essentially on macro. So you're seeing that Chinese aluminum exports has been at phenomenal level, in fact, enough to cover 20% of global -- I mean, China demand. So would you see further headwinds to LME aluminum prices due to this, while other regions might -- like Europe and all might face aluminum cut, but unless and until something happens in China, we are going to see LME prices building in the pressure. So, I just wanted to get your thoughts on that.
So, I don't know whether I would agree with that it's 20% of the rest of the world demand, because that's a pretty large note. But I think that, yes, their exports have gone up, we saw recently. Europe, in spite of the problems has introduced ADD on Chinese aluminum. I think that the post-COVID type of lockdown to Chinese demand should come back internally a little bit. I think that their ability to export will still remain fairly restricted to the U.S. So I don't necessarily think that a huge Chinese export of aluminum will bring the aluminum prices down further. I don't think so.
The second question is essentially, you indicated that because of supply chain issues, downstream aluminum sales volume was lower in this quarter. So if these supply chain issues had not existed, how much incremental sales volume would have been there? And whether this sales volume is pushed to Q2?
Are you talking about the India business?
India business. Yes.
Yes. I think roughly about 7 to 10 Kt has got blocked. So that will be pushed to Q2.
We have next question from the line of Vishal Chandak with Motilal Oswal.
So my question was with regard to your smelter expansion where you had mentioned that the Pumped Hydro project would be under observation for some time. So just wanted to understand, where are we in that stage? Have we started the Pumped Hydro operations? And what kind of expectation do you have right now on that?
So look, I think you'll probably see an announcement tomorrow. The Pumped Hydro will come online December of 23. So I think that any smelter expansion we are talking about is a 24, 25 type of -- So it remains under appraisal. Right now, we are focused on trying to get the Pumped Hydro up, the downstream projects and the Alumina.
Sir, if I understand correctly, the Pumped Hydro gets installed in December 23, another year of at least observation, when we -- if it goes through, then we put up the plans for CapEx, when we place orders. So 24 onwards we place orders?
No. Then we actually do the proper appraisal looking at the LME and all and see whether it still makes sense. I just want to repeat -- I know I get asked this, the port expansion is the last project on my priority list. I have a lot more projects to do before that.
Second question was with regards to the hedging. If you could just help us on the LME hedging, where are we? And what is the plan going forward?
So quite boring answer. Nothing has changed. So we remain at 30% at INR 2,500 crores for this year, 30% hedged at INR 2,500 crores. And the currency, we are 14% hedged at INR 81.4 crores. And in FY '24, we have about 60 Kt hedge debt INR 3,000 crores. We have not done anything in the last few months.
We have next question from the line of Ritesh Shah with Investec.
Sir, my first question is the emphasis on the world of solutions and positions provider. I would like to have your thoughts over here.
Yes. I think that because as we get into the downstream business and we move out of just providing what we call common alloy, which was 3,000 CDs, we are now providing foil stock, we are providing housing foil, we are providing can body stock, we're providing NTT sheets, we are providing extrusions, doors and windows. So we are getting more and more closer to the end product. And hence, we are getting into more of machining and doing fabrication. So the sort of margins go up and the valuation also goes up. So that's what we mean.
Sir, my second question is, when we do give a guidance on cost of production, I would want to understand that -- like is this something on a consumption cost basis that we guide or on a sequential basis?
Yes. The cost of production is based on consumption. It's our actual cost of production. It's not based on what we have in inventory. So when I tell you it's going to go -- it went up 17%, that was the actual cost of production went up in Q1, 17% versus Q4, and I'm seeing high-teens again for Q2.
Sir, if it's possible for you to share EBITDA then for upstream and downstream for Q4 FY '22? You have given for Q1 it's not possible. Okay. Let me put it the other way. The number for the cost what you are saying, if we build that for well, what essentially implies is the premium cost moved up very sharply. Is that inference right? And if you can provide some color over there, that would be useful.
Sorry, what has gone up sharply?
Premium realization less levy?
This MJP has not gone up sharply. The MJP actually has gone down a little bit.
Okay. Sir, what I'm trying to tap is, on the EBITDA per the movement on a sequential basis, the cost of production, what we have indicated is here. Based on our implied math, that number hasn't moved up very sharply. So the premium should have moved up. That's what I'm just trying to comprehend the operation.
No. Just to answer your question, see, the reason as we explained in one of the earlier answers as well, why it doesn't tie. When we talk of cost of production, it is the current cost of production. But let's say, when we started the quarter, there is a certain amount of metal inventory which is sitting with us. That is based on the cost of production of the previous quarter, which was lower than the current quarter. So the benefit of that low-cost inventory at the beginning flows through in this quarter. So that is the reason why you see some kind of a difference between the cost of production as we are talking about, and the EBITDA that you are trying to calculate. I don't know if I'm clear to you.
Yes. That helps. And just last question. On a stand-alone...
And before you ask the next question, let me also clarify, when we move from Q1 to Q2, there is no low-cost inventory sitting in our books at the end of Q1, because by the time Q1 end came, we are already -- the cost of production has already moved up significantly.
Last question. How should we read into effective a portion of cash flow in terms of INR 3,050 crores which is there on the paper?
Yes, you're referring to the OCI sheet, right?
Correct.
It basically means that whenever the LME goes down, the cash flow hedges become positive, because effectively, your benefit from the hedges goes up, or the losses on the hedges goes down. And the vice versa happens on the other way as well. That's how you should read it.
So what that number would be at this point in time?
We don't calculate this on a day-to-day basis. It is calculated at the end of the quarter or the end of the month. But really speaking, that number is more notional because that does not really tell you what would you finally realize or not realize. Because that's a notional number at the end of the period.
We have next question from the line of Abhijit Mitra with ICICI Securities.
Just to sort of clarify one thing. Since we are calculating as an outsider and you are suggesting that the inventory has helped the cost this quarter or at least the EBITDA print. So next quarter, from where we will be looking, we'll be seeing about 25%, 30% kind of a cost increase, right, if I understand you correctly? Because there's an accumulated cost increase of Q1 plus a mid-teen cost increase of Q2, which will come through.
No.
Reported number from an external observation point of view, it will look like a 25%, 30% increase in cost.
I'm saying high-teens increase from the cost level of Q1, not cumulative.
Yes. But I think from where we will be observing it would be cumulative, right? Because this quarter, we are not being able to see any cost increase because of the inventory impact which you are suggesting.
No. So, look at it in 2 parts. One is the cost of production, and the second is the benefit of the low-cost inventory at the beginning of the quarter. In Q1, you will see that there is a certain cost of production that we talked about, which is what we said 17% higher than the previous quarter. That gives you a certain cost of production. Now in the EBITDA tally or EBITDA reconciliation, you would factor in the benefit of certain inventory that is lying in the beginning of the year, not so much of the raw material, but more of the metal inventory where the cost of production of the previous quarter has gone into it. That benefit will not be available in the coming quarter. But on the cost of production, excluding that benefit, you will see a high teen increase is what our expectation. So you can look at it in different ways and you can compare, but this is the essence of what is happening.
And the second question is on downstream volume -- value. I think you mentioned something about the valuation. How is it – right -- You said that over a point of time, it will sort of lead to improvement in margins and valuations? Are you looking at a separate business now? Or -- what are the thoughts there?
No. Let's go step at the time. We just -- first quarter, we have just split out and reporting. So what I know -- my valuation point of view is that our pricing and all that, that we can command, is also going up. That's what I meant.
We have next question from the line of Kamlesh Bagmar with Prabhudas Lilladher.
Congrats on the performance and the classification of business. Sir, one question on the part of our downstream. So if you look at your CapEx plan, like you are increasing your downstream capacity at a cost of say around $2,500, $2,600. Against that, like, we would be making an EBITDA per ton of around $300. So it's almost a recovery of around 8 to 8.5 years. So do we see these margins to elevate to a higher level or -- because honestly, on a medium-term basis, these are not yielding that great returns what we are doing in the upstream expansions or capacity.
No. I think that -- look, any of our new projects -- and I've discussed it before, is, what you're seeing today is the basis of investments done long before that we had just cleaned up for better quality than that. The new projects are all in mid-teens IRR. So they are all coming at a higher EBITDA per ton.
Sir, I was looking at your CapEx announcement, which you have done in March, so around $400 million for a capacity of [ 117-118 ] staff mix of around $2,400. So based on that -- and that also for -- just on the core rolling. So –
This investment is still underway. This has not resulted -- I mean it will take some...
No. That's what he's saying that we're using the current EBITDA per ton, but for those products, the EBITDA per ton will be higher.
Yes. And you are forgetting that we already have the hot mill, which is a large part of the investment. So additionally, we'll get the benefit of that hot mill available in our system.
That project has been approved on the basis of an IRR, which is mid-teens.
And sir, lastly, I may be relying again on that cost part. So we can't -- you have an inventory of max 15 days, not beyond that, because in aluminum, nobody carries such a high inventory. So if you see the dollars -- on a dollar cost basis, last quarter, it was $2,180, based on the data which has been provided separately for the downstream, upstream. So it was $2,180 and in this quarter it is $2,109. The activity cost has come down in dollar terms. And on rupee terms also it has come down. So honestly, it's very difficult to gauge the fact that -- because we have the inventory, so our cost has not gone up, but you have the current booking more than 15 days or 20 days.
So look, I think that I'm going to ask you to do a little bit of reconciliation which could be offline. But our costs from our basis have gone up by 17% is what we have. So what numbers you're using, we will have to -- I'll get Subir to sit with you and reconcile, okay? I cannot do it on the call here.
We have next question from the line of Ashish Kejriwal with Centrum Broking.
Again -- this is again on the cost side only. You mentioned about 17% increase in cost. But I think it's better if we can provide something like on a per ton basis, if not this quarter, maybe next quarter onwards. Because the kind of numbers which we get from you as an external guy, we are unable to calculate the cost, and as earlier participants are also pushing the same. But on our calculation, even if we exclude the downstream businesses and just derive cost by reducing revenue minus EBITDA, and on a per ton seems to be lower on a quarter-on-quarter basis.
Yes. So, we will look at it how…
We'll see how we can make it clearer for you guys. Point taken.
We have next question from the line of Sachin Wadhwa with Profusion Investment Advisors.
Can you just provide some clarity on the downstream business and why we've got such a big jump in EBITDA per ton, and what sort of number is sustainable going forward in terms of can basis?
Yes, I don't think sequentially it's such a big jump. I mean, the Q1 of last year is a little bit misleading because that was the second phase of COVID. And most numbers when you look at it in Q1 of last year, the comparison look a little bit -- If you look at my historical discussion we were having, we were already always saying that the existing business is around $100, $120 EBITDA per ton. So now I think that over the last year, we got to be fair, like we have seen in the Novelis business, very good price increases. So we've got a lot of price increase and then we exited some of the sort of common alloy low end of the market and went heavily into foil stock, foil. And all those have paid off and given us a good EBITDA per ton. I think from -- you will see in the next few quarters that we are going to do a little bit better than the INR 260 crores and nearly INR 275 crores to INR 300 crores is my guidance.
We have next question from the line of Indrajit with CLSA.
A macro question. So we have seen some of the downstream companies talking about FMC and year mark, maybe 10% of input materials to be taken from only companies who have committed to some net 0. How does that impact us given our carbon driven or coal driven production? How is the medium-term plan? I understand that the new capacities will be renewable based, but what happens with the existing capacity?
Sorry, I didn't get your question. What happens to the existing capacities in what?
Because that would be difficult to have net 0 carbon emission, right? Because it is always coal-based power generation. So how are you seeing that over there?
Yes, we have made a plan out till 2050, and that is dependent on a number of things happening. By the way, India has made a plan into 2017. So the power source in India also has to change with time. So I think that we have got certain things that we are doing in the short term. Certain assumptions in the medium term, there are some hydro, and some other gas, natural gas and all will come in. And that's how we have built a model which will take us to 2050. I mean it's an -- issue that is we're facing all aluminum and all power users in India to transition out of coal. But this -- the long term, I think I want to emphasize that it's more of a 2050 than the 2030.
My second question again is on the hedging side. So how do you see prices move up, in the sense that do you not see merit in hedging more for '24 yet? Or do you see prices to have an upside risk from here and that is why we are not hedging more for '23?
Very good question. I honestly don't know the -- we are expecting to see what happens when the current uncertainty goes away, because fundamentals of supply and demand say that the LME should be higher. Right now, there is a fear about recession, Chinese, the war that's keeping it down. And the power content is very small. So we are waiting for the macro environment to get a little bit more clearer before taking longer-term position.
We have next question from the line of Pallav Agarwal with Antique Stockbroking.
Sir, could you give us a quantity of external Utkal Alumina sales?
Yes. Actually, this current quarter, the sales was a little bit on the lower side. We sold only about 67 Kt. So some of the ships were actually -- could not sail. So next Q2 we'll be selling about 150 Kt.
And very broadly, if I were to try and get Utkal EBITDA or the drive from the segmental EBITDA, so do I use the upstream numbers that you've reported and moved in from the stand-alone to get some sense with Utkal Alumina? Is that a headway to approach it?
I think you should not try to get Utkal EBITDA besides the third-party sales. The stuff that goes directly into our aluminum is in our cost of production, which we tell you. I think that the separate EBITDA, which is the real EBITDA that contributes to our bottom line, is the third-party sale, which ages gave you the numbers.
Okay. So which is not very significant at least in this quarter?
Well, this quarter, it was not, but I gave you the number for next quarter is 150 kt. So it will become sizable in Q2. And this year, our target sales is roughly 450 kt of third-party sales.
Sir, also a question, MJP has been pretty subdued, but probably the premiums in other regions of the world still remain very strong. So what's a lot of disconnect? Is there more supply in Asia compared to the rest of the world?
Well, I think the MJP is down because of the Chinese demand being weak. A large part of the MJP is because the Japanese premium is -- Japan exports a lot of cars and aluminum things into China. So I think that is driven a little bit by the weakness in China. In the Asian market, original premiums tend to be driven by freight costs and handling costs on a local basis. So I think right now, the European premium is very high and the U.S. has moderated. Steve, do you have any comments on the Europe -- Midwest?
No, it's moderated a bit, and it is just the flow of metal and some level of tariffs and duties that drive some of the different premiums in Midwest and ECP.
Ladies and gentlemen, that was the last question. I would now like to turn the call back over to Mr. Satish Pai for closing comments. Over to you, sir.
Yes. Thank you [indiscernible]. So look, I think that our broadly diversified business model between Novelis, copper, India, upstream, downstream, plays off to get these good results. It'd be fair to say going ahead, the cost pressures are going to impact the aluminum upstream business, whereas we expect the other 3 businesses to do well. So with that, I thank you for your attention. Thank you.
Thank you very much, sir. Ladies and gentlemen, on behalf of Hindalco Industries Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.