Hindalco Industries Ltd
NSE:HINDALCO
Earnings Call Analysis
Q3-2024 Analysis
Hindalco Industries Ltd
Amidst a backdrop of persistent economic challenges, the company's earnings call offered a glimpse into their expectations based on IMF predictions: global growth is set to remain steady at about 3.1% in 2024, with advanced economies growing at a moderate pace, led by resilient growth in the U.S. and recovery in the euro area. While China's growth is projected to slow, emerging markets are expected to maintain a 4.1% growth rate, mirroring their 2023 performance.
In the aluminum industry, challenges such as power shortages in China and flat year-on-year production outside China have influenced global supply and demand. The resulting surplus was roughly 0.6 million tonnes by the end of 2023, with a marginal increase in global aluminum prices. The copper industry reflected a slight imbalance, with global production outstripping consumption, leading to a surplus of 0.2 million tonnes, amid a backdrop of increased production and consumption in China and a demand uptick in India.
The earnings call spotlighted the company's resilient India business and its expanded EBITDA margins due to lower production costs and steady commodity prices. The copper business, in particular, was noted for its strong performance and strategy focused on value-added products. Highlighted projects include India's first copper and e-waste recycling project and the construction of the highly efficient Bay Minette facility, which despite its cost escalation, is seen as a strategic investment with potential for expansion.
The company underscores its commitment to ESG goals with initiatives like the 100 megawatts of carbon-free power planned for its Odisha smelter. International recognition for ESG efforts and an energy transition award reflect the company's achievements in sustainability. The strategy remains focused on organic growth and expanding downstream businesses in aluminum and copper, cementing its commitment to a strong balance sheet and long-term shareholder value.
Key takeaways address uncertainties about project costs, particularly the Bay Minette project, which has seen substantial cost overruns primarily due to civil and construction costs. Management expressed 85% confidence in the $4.1 billion project budget, despite these increases. The company conveyed its intention to update on the progress of construction and remaining contingencies on a quarterly basis, seeking to reassure investors about the project's feasibility and potential long-term benefits.
The company has applied for the 48C energy grant under the Inflation Reduction Act, which could offer financial benefits for the Bay Minette project. Although optimistic, any potential grants have not been factored into the project’s current cost estimates. The confirmation regarding the impact of the act on the financials is expected by the end of March.
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Ladies and gentlemen, good day, and welcome to Hindalco Industries FY '24 Third Quarter Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Subir Sen, Head of Investor Relations at 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 third quarter of the financial year 2024. In this call, we'll refer to the Q3 FY '24 investor presentation available on the 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 call, we have covered the key highlights of our consolidated performance for the third quarter of the financial year '24 versus the corresponding period of the previous quarter -- previous year. A segment-wise comparative financial analysis of Novelis, India Aluminum and Copper business is also provided. The corresponding segment information of the prior periods have also been reinstated accordingly for a comparative analysis. Today, we have with us on this call from Hindalco's management, Mr. Satish Pai, Managing Director; Mr. Praveen Maheshwari, Chief Financial Officer. From Novelis' management, we have Mr. Steve Fisher, President and CEO; Mr. Dev Ahuja, Chief Financial Officer. Following this presentation, this forum will be open for any questions you may have. Both this call and audio replay of this conference call will also be available on our company's website. Now let me turn this call to Mr. Pai to take you through the company's performance in this quarter.
Yes. Thank you, Subir. Good afternoon, and morning, everyone, and thank you for joining today's earnings con call for Hindalco.
Let me start with some good news. Hindalco is among the top 1% in the aluminum industry in the recent S&P Global DJSI Sustainability Yearbook 2024. A total of 66 companies are in the top 1% out of the total 9,400 companies that were assessed. And only 2 Indian companies are in the top 1% based on the ESG score in which Hindalco is one of them. This recognition emphasizes our unwavering commitment and a comprehensive strategy that we have towards our long-term ESG excellence. On Slide 6 and 7 of this presentation, you can see our achievements and progress across metrics of ESG for this year versus the prior period. I'll now take you through some key highlights in this quarter. We have successfully completed an all-season study under our biodiversity management plan for 4 more sites, taking the total number of -- to 20 sites now. The CII biodiversity Index and carbon sequestration ground assessment was completed in 5 additional units, taking the total number to 11 till date. In the first 9 months of FY '24, 84% of the total waste generated was recycled and reused. We have achieved recycling of 107% of bauxite residue, excluding Utkal, and 106% of the Fly Ash in this period. Our aluminum specific GHG emissions was recorded at 9.46 (sic) [ 19.46 ] tonnes of carbon decide per tonne of aluminum, which is a bit higher than last year in the same period on account of higher power consumption at some of our smelters. This is expected to settle down with better efficiencies across the plants in the coming months. In terms of our progress in renewables, we have already achieved more than 50% of our target of 300 megawatts by 2025 and have completed 152 megawatts of renewables till date. Further 50 megawatts of solar and wind renewable projects are under execution and will be completed by Q1 of FY '25. A 100 megawatts hybrid power project is on course to be commissioned in Q4 calendar year '24. Two battery storage projects at 2 of our mining locations have also been commissioned during this quarter. On LTIFR in India, we recorded 0.21 in the first 9 months of FY '24, showing an improvement against last year's performance while remaining among the best in the industry. We continue to take digitalization initiatives and comprehensive safety audits to further strengthen our systems to monitor safety across our plant location. There were no fatalities recorded at our Indian operations during the first 9 months of FY '24. We are on our way to achieve net water positivity by 2050. We have recently collaborated with CII's Triveni Water Institute for certification at 5 of Hindalco's plants in line with our target of achieving water positivity across all mines by 2025. We have also initiated various desalination and other projects to achieve this growth. As a result of our desalination project and tertiary water recycling at Dahej, this enabled us to significantly drop the water -- freshwater consumption from 17.74 meter cube per tonne of metal in the first 9 months of FY '23 to 9.4 in the current period. On research and development, we have started projects like removal of aluminum chloride from affluent generated from our smelting operations, and post trials will now go for upscaling.
Let me now give you a glimpse of the last quarterly consolidated performance in quarter 3 versus the same quarter of last year on Slide 8. This quarter's performance on a consolidated basis was driven by strong recovery at Novelis and cost control in the Aluminum India business, backed by a continuing record performance by the Copper business. Our consolidated business EBITDA was up 36% year-on-year at INR 6,985 crores, whereas our overall reported EBITDA was up 61% at INR 6,322 crores this quarter. The consolidated net profit after tax was up by 71% on a year-on-year basis at INR 2,331 crores. In India Aluminum business, we are currently hedged around 22% of the commodity at a price of $2,636 per tonne for the last quarter of the financial year 2024, and around 5% of the commodity for FY '25 at a 0 collar with a bottom at $2,200 and a ceiling at $2,500 per tonne. On the balance sheet side, our consolidated net debt stands at INR 34,835 crores. In the Indian operations, we have net cash of INR 3,632 crores, while Novelis' net debt stands at INR 38,467 crores at the end of December 2023. During the period, we prepaid a long-term debt of INR 4,370 crores in the Hindalco India operations. Hindalco, at the consolidated level, continues to maintain a strong balance sheet with a net debt-to-EBITDA well below 2x at 1.43 at the end of December 2023, which is lower than last quarter as well as the same period of last year. All our strategic CapEx in India is mapped with the cash flow generation in the business and is in line with our capital allocation policy. Coming to our business-wise performance this quarter, Novelis shipments were at 910 Kt versus 908 in the prior period due to softer market demand and impacted by seasonality, but more than offset by recovery in the beverage packaging and automotive demand. Novelis delivered a quarterly EBITDA of $454 million, up 33% year-on-year on account of favorable metal benefit from recycling, higher pricing and lower operating costs this quarter. The resultant EBITDA per tonne stood at $499 versus $376 in the previous quarter, up 33%.
On Hindalco's India Upstream aluminum performance this quarter, shipments and revenue both were lower by 1% year-on-year. EBITDA was up 54% year-on-year at INR 2,443 crores, primarily supported by lower input costs. The results in EBITDA per tonne was at $880 higher by 53% year-on-year. EBITDA margins were also higher at 30.7% this quarter and continue to be one of the best in the global industry. This quarter, the India Downstream Aluminum business was majorly impacted by unfavorable product mix and lower realization, which led to a 34% year-on-year decline in the quarterly EBITDA at INR 103 crores versus INR 157 crores in the prior period. The resultant EBITDA per tonne was recorded at $137 per tonne, lower by 35% year-on-year. This is transitionary -- transitory and is expected to recover in the coming quarter with domestic demand for aluminum growing at a CAGR of 6% to 7% across product segments. Our Aluminum Downstream continues to be an exciting space as we explore new solutions, particularly for new-age mobility. Our Copper business continues to deliver consistent performance this quarter as well. The overall metal shipments were at a record high of 119 Kt, up 9% year-on-year, of which the CCR volumes were at 93 kt, up 6% year-on-year. The quarterly Copper EBITDA was at an all-time high of INR 656 crores, up 20% year-on-year on account of higher shipments and robust operations this quarter. Now let me give you a glimpse of the current broader economic environment on Slide 11. As per the IMF, global growth is forecasted to remain steady at 3.1% in calendar year 2024, maintaining its 2023 phase. Advanced economy's growth is forecasted to remain steady at 1.5% in 2024 from an estimated 1.6% in 2023, led by resilient growth in the U.S. and a mild recovery in the euro area region. Growth in emerging market economies is projected at 4.1% in 2024, mirroring the growth recorded in 2023. In China, growth was set to moderate from 5.2% in 2023 to 4.6% in 2024 due to deflationary pressures, a continued slowdown in consumption and strains on the housing sector, thereby constraining investments. Risk to the outlook are balanced at steady growth and moderating inflation paved the way for a soft-landing scenario. The upside risk to global growth projections are from faster-than-expected disinflation, leading to monetary policy normalization by major central banks. Geopolitical tensions and political uncertainty due to the busy electoral calendar present key downside risks to the global growth outlook. As per IMF, global inflation is expected to continue its ongoing decline into the current year from 6.8% in 2023 to 5.8% in 2024. However, core inflation may prove to be stickier and is expected to decline more gradually. On the domestic front, despite several external headwinds, economic activity in India is expected to remain resilient. Going forward, the RBI projects GDP growth to remain robust at 7% in FY '25, driven by private CapEx and consumption demand compared to 7.3% in FY '24. Downside risk from a deteriorating external environment as geopolitical tensions may lead to commodity price fluctuations and external demand remains weak. Assuming a normal monsoon and bearing further [ shops ], inflation is projected by RBI to decline to 4.5% in FY '25 from 5.4% in FY '24. The interim union budget FY '25 held good on fiscal consolidation. The budget announcements were focused on growth-enabling sectors, like infrastructure, affordable housing, green energy and bodes well for the private sector. Headline inflation impacted by fluctuating oil and food prices will be closely watched by the RBI, which has kept rates on hold at 6.5% since February of 2023. Moving on to the aluminum industry outlook on Slide 12 to 14. Let me first talk about China. In Q1 calendar year '23, production in China declined marginally due to tight power supply in Yunnan, Guizhou, but in subsequent quarters, this production moved -- improved due to the government releasing power to the smelter, and the improved hydropower situation in these provinces. However, in Q4 calendar year '23 due to power-related shortages in Yunnan, production declined marginally. The resultant overall production in China stood at 41.5 million tonnes at the end of calendar year '23, reflecting a growth of 4%.
On the consumption side, Chinese demand spurred by 5% year-on-year in calendar year '23 at 42.8 million tonnes, led by strong solar and EV productions that were offset by the weak construction demand. As a result, Chinese market ended up in a deficit of 1.3 million tonnes in calendar year '23. In the world, excluding China, production was flattish year-on-year in Q1, whereas production improved in the subsequent quarter. In Q4, production continued to remain flat and overall production in calendar year '23 stood at 29.1 million tonnes, reflecting a growth of 1% year-on-year. On the consumption side, except for automotive, all other segments like building and construction, industrial machinery, consumer durable, faced headwinds due to rising interest rates. Hence, in calendar year '23, the overall consumption declined by 4% year-on-year, to 27.3 million tonnes, resulting in a surplus of 1.9 million tonnes at the end of calendar year '23. So the overall global production stood at 70.6 million, whereas consumption was 70.1 million, resulting in a surplus of 0.6 million tonnes in calendar year '23. The global aluminum prices in this quarter improved marginally to $2,190 a tonne as against $2,154 a tonne in Q3 of calendar year '23. On a quarter-to-date basis, the global price of aluminum is around $2,200 a tonne.
In Q3, financial year '24, the Indian aluminum demand is likely to reach 1.3 million tonnes, reflecting a growth of 9% on a year-on-year basis. This sharp increase is supported by very strong demand from the electrical sector and good demand from building and construction and auto sectors. However, the packaging segment faced some headwinds due to weakness in the export-led demand, whereas consumer durables showed weakness in the cookware and the cookers segment. The global FRP demand is expected to grow by 4% in calendar year '24 versus a 4% decline in the last calendar year, with demand recovery across all major segments of beverage packaging, automotive, speciality and aerospace, giving a CAGR of 4% to 7% over the next 3 to 4 years. The Indian FRP demand is expected to be flattish on a year-on-year basis as estimated growth in the automotive, building and construction and consumer durables segment will be offset by ongoing weakness in the packaging segment.
Turning to the copper industry on Slide 15 and 16. In calendar year '23, the overall global copper production grew by approximately 3.7% at 25.6 million tonnes. In contrast, consumption also grew by 2.4% year-on-year at 25.4 million tonnes, resulting in a surplus of 0.2 million tonnes. In calendar year '23, Chinese production increased by approximately 8.7% at 11.5 million tonnes, whereas consumption grew by almost 6.5% at 14.5 million tonnes, resulting in a deficit of 2.9 million tonnes of copper. The world, excluding China, production declined marginally by 0.1%, whereas consumption declined by 2.7% year-on-year resulting in a surplus of 3.1 million tonnes in calendar year '23. In the fourth quarter of calendar year '23, the overall global production of copper increased by 0.4%, while consumption declined by 0.6%, corresponding to -- compared to the corresponding period of last year, leading to a deficit of 0.3 million tonnes. On the domestic side, in Q3 FY '24 market demand increased by approximately 4% year-on-year at 198 Kt versus 190 Kt in Q3 of FY '23. On a sequential basis, market demand declined marginally by 1%, with domestic product -- producer's shares at 67%. For the calendar year '24, the annual benchmark TC/RC settled at $0.205 per pound. This settlement reflects a decrease of 9% compared to calendar year 2023, benchmark of $0.226 per pound. During Q3 FY '24, the supply side faced challenges due to lower guidance from Anglo American for the year 2024. This, Combined with the Closure of Cobre Panama, led to the tightening of market conditions. The spot TC/RC this quarter was around $0.19 per pound. The ongoing strong demand from Chinese smelters coupled with tight supply, may influence the spot TC/RC further.
Now [indiscernible] operational and financial performance in each of the business segments this quarter compared to the corresponding previous quarter, [Technical Difficulty].
Sorry to interrupt you, sir, but your voice is breaking. We can't hear you. I guess there is some...
Sorry, I -- you are saying that my voice is breaking.
It's fine now. Please go ahead. I guess there was a slight disturbance, so I guess the mic was moving or...
Okay. The mic was not, but anyway. So let me conclude today's presentation through some key takeaways and our way forward. Our Resilient India business with its strong balance sheet is providing solid financial prudence to our organic growth strategy. We also continue to focus on resource security in terms of coal and bauxite, thereby reducing our dependency on external sources. Once again, our Copper business delivered its best-ever performance as we continue to focus on value-added products in Copper. Hindalco acquired land and began to work on India's first of its kind copper and e-waste recycling project in Dahej. Meanwhile, our Inner Grooved Tubes project, which is under execution, is expected to be commissioned by end of calendar year '24. Novelis delivered $499 per tonne EBITDA this quarter despite the seasonal impact. Our Q4 guidance of delivering a sustainable $525 EBITDA per tonne remains intact as the market continues to recover in beverage packaging and other markets show resilience. While the capital expenditure for the Bay Minette project has escalated primarily due to higher civil and construction costs than initially estimated, I have to repeat that the strategic rationale remains firmly in place. This investment provides a first-mover advantage with a highly efficient facility that is being built as a long-term investment.
Once established, this capacity can be doubled in a cost- and time-efficient manner as experienced in various other brownfield projects done by Novelis over the last few years. Our approach to ESG continues to be comprehensive across value chains and in line with our 2050 ESG targets. Our first-of-its-kind energy transition initiative is on course to begin ramp-up of 100 megawatts of round-the-clock carbon-free power for our Odisha smelter by Q4 of calendar year '24.
Our recent global recognitions are testimony to our ESG efforts as Hindalco continues to be among the top 1% in the aluminum industry in the S&P Global DJSI Sustainability Yearbook of 2024. Hindalco also recently won the Energy Transition Changemaker Award at COP28 for setting up one of the first round-the-clock renewable energy projects backed by pumped hydro in the aluminum sector. We stay focused with our value-enhancing growth strategy directed towards organic growth, while expanding Downstream businesses in both aluminum and copper. We also stay committed to maintain a strong balance sheet position and focus on shareholder value creation in the long run. Thank you very much for your attention, and we will now open up the forum for questions and answers.
[Operator Instructions] The first question is from the line of Amit Dixit from ICICI Securities.
I have 2 questions. The first one is again on the Bay Minette project. So while you indicated that the cost escalation has been primarily due to civil and -- civil construction. So just wanted to understand if the scope of work has been increased or was there something we found during oil testing phase that we had to [ buttress ] it. And whether we expect more escalation due to equipment ordering or -- I mean, where are we on that? I mean I just wanted to understand if there are any more contingencies that we could expect going ahead in Bay Minette?
Go ahead, Steve.
Yes. So [Technical Difficulty] structural. 80% of all the cost is coming in that. It is to do with the civil -- a lot to do with the soil conditions, where the location is, something that as we did more engineering understood, requirements of quantities of concrete, quantities of steel, quantities of [ tiling ]. These are all things that have driven the cost up. As we've talked about, where we're at today at $4.1 billion, we are confident that we've included appropriate levels of contingencies for a project at this stage. As I spoke yesterday, we have a [ P85 ] confidence level of bringing the project in at the $4.1 billion. As it relates to equipment, something that we're honestly better at because of the brownfield expansions in the past. We are very close to our original estimates on equipment. We ordered all the equipment [Technical Difficulty] little bit of overrun with warehouse to store the equipment. But we have contracted and are finishing some part -- some of the equipment as we speak, and everything is well on schedule with the equipment, and I would not expect any further escalation on the equipment side itself.
My second question is essentially on domestic Aluminum Upstream business. What was the cost? How would the cost change quarter-on-quarter in Q3 and the guidance for Q4, please?
Yes. Look at [Technical Difficulty].
Sorry, sir. I can't hear you. Your voice is breaking again.
I'm breaking, again. Can you hear me clearly now?
Yes, I can, sir.
Yes. So I was just saying that if you saw that this quarter, our EBITDA margins expanded. And largely, that's because I had thought that the cost will be flat, but the costs were down 3.3% Q3 to Q2. And a large part of that was coal costs coming down as well as carbon CP coke. So -- which is why our -- with the flattish LME, our margins expanded. Now in Q4, I'm expecting the cost to remain flat with Q3.
Just a follow-up on this. When I saw Coal India's numbers yesterday, there's new auction price. Now your coal cost has gone down possibly because of the inventory effect. Now going forward in Q4, since e-auction prices, we know that at the entry of Q4 itself, they are down. So wouldn't you expect some relief on coal cost trend in this quarter?
So really, Amit, how it works is that if we procure end of January, February, the consumption will happen in April, May, June. So when I give you the cost, I give you on a consumption basis and not on a receipt basis. So it -- and currently, right now, normally another question gets asked, our linkage coal percentage has been steadily going up, and it's now nearly 60% and the e-auction is 36%. So I have a feeling that the coal cost, I hope they go down a bit more, but I'm conservatively estimating Q4 to be flat. We'll have to see what Q1 does.
Very clear, sir.
The next question is from Sumangal Nevatia from Kotak Securities.
Firstly, congratulations, Mr. Pai on your reappointment and extension of term.
Thank you.
Sir, a couple of questions. Firstly, just want to understand, I mean, I'm not able to clearly understand what is this 85% probability of no further increase in cost? I mean can you explain how do we arrive at this number? Number one.
And second, since there is -- I'm talking about Bay Minette. And second, since there is such a significant deviation, is it possible just for some more comfort to give some breakup of this $4.1 billion? What is the civil structure costs, equipment costs, some breakup to kind of better appreciate this change?
Yes. So to be clear, on the P85 confidence level, we've had both our [ EPCM ], another engineering firm and a third firm take a look at the rebate lining that we've been doing over the past 3 months as it relates to completing the detailed engineering at a high level now. As that's completed, we are confident with where we're at from units and quantity and what we've ordered so far. From there, we would attach confidence levels as it relates to the stage of the project, the level of engineering done to be able to say, are we able to complete this project for $4.1 billion that we disclosed on schedule in the second half of calendar '26.
And this shows you, with those analysis done 3 different separate ways and analyzed by the management team that we are 85% confident that we can deliver at $4.1 billion. On the second, as we've said, 80% of this is associated with civil and structural. I won't give out specifics, but it's a larger needed quantities, whether it be tilings, whether it be concrete, whether it be steel, whether it be electrical throughout the plant. These are some of the categories of which we've seen significant increases in as we finish the engineering design work on it. And of course, what comes with that is the inflation and labor costs on top of that, too. So again, where we have a lot more experience associated with projects like this on the equipment side where we have not seen the equipment increase except for where we've had small amounts of increase in the type of equipment that we want to put into the plant to make sure that it is highly efficient.
So Sumangal, just to clarify, the EPC firms use this terminology of jargon like P85. So where we are P85 is a fairly good probability number is what I just wanted to add.
Okay. And during what phase of this next 3 years of construction, do we move to more closer to 100%? I mean, 90%, 95%, how is this time line?
It's linear. Obviously, as we get larger parts of the construction completed that contingency will continue to come down. And as we talked about yesterday, we will continue to update on a quarterly basis where we are as it relates to the construction.
Okay. And is it possible to get some sense out of this $4.1 billion, what is the percentage of equipment costs and other costs? I mean just some breakup.
Yes. So when you start to think about the other 20%, there is some small amounts of additional equipment that we put into the plant. This is not huge amounts. It's additional [ piping ] electrical for the equipment layout as we finalize the equipment layout in the plant, its control system. It's as I said before, the need for additional warehouses because the equipment is actually well on schedule, and it's going to come ahead of the plant construction itself because of the civil and structural engineering was behind. And so we've had some costs associated with storing equipment as well. And then, of course, as we lengthen the schedule, owners' costs as well.
Okay. Got it. Got it. That's clear. One question I have for Mr. Pai, and this is more a common question we're getting from various investors during the day. I mean, given this substantial rise in CapEx, structurally lower returns that we expect now at least from Phase 1, I mean, was there a discussion consideration of scrapping the entire project, writing off given that -- I mean, it's such a huge commitment into some bit of uncharted territory. So any consideration on these [ fronts ] happened within -- just want to understand.
Yes. I mean it's fair to say we had a lot of discussions on this project. But -- so the -- Sumangal, our view is the following. So Novelis is the market [ leader ]. It's by far the largest rolling company in the world. North America is the one market in the world that is undersupplied and is actually importing can body sheet into the U.S. coming from Asia, China. All our customers wanted this. Based on this project, we managed to get the can pricing to substantially move higher, which benefits not just Bay Minette, but our home can portfolio going forward, which is why I think yesterday, they already -- you must have heard Dev and Steve talk about $600 per tonne EBITDA target going forward. So I think that for us, the other, let's put it very purely financial metric, is that a double digit on a dollar return is still much better than the cost of capital that Novelis had. And then the next point, which you have seen what has happened with Novelis over the last 2 or 3 years. This project, we can go from 600 Kt to double with the CapEx of 1,500 to 2,500, depending on the mix and the finishing equipment we put in. So you will see that the sort of double-digit can go as we go forward to much higher returns. And it puts a platform in the largest rolling market in the world, which is the U.S. So I think that for us, we are quite committed to getting this project forward. It's fair to say that the onus is on us to now execute and deliver this as we said. I know that we will not get any more margin for error that I expect.
Understood. Just one last question, and thanks for the detailed explanation, sir. On the copper EBITDA, we've consistently been doing more than INR 600-odd crores on a quarterly basis. So is there any structural tailwind and one should expect this kind of a run rate going forward? Or is it something cyclical here?
No, I don't know, I would say it's cyclical. I think that the Copper business is going through some very good demand. The electrification sector is quite going strong. So I think that structurally, the copper is going to be good going forward. I do expect when the competition of some other people come in, we may see some pressures on the copper prices. But I think that that's why we have diversified our strategy and going into the Copper Inner Grooved Tubes, they're going into copper recycling. So I think that we will continue to take -- go more downstream in copper to make sure that we can maintain our leadership.
Next question is from Ashish Jain from Macquarie.
Sir, I had 2 questions pertaining to Novelis. Now Steve highlighted that large part of the cost increase was driven by commodity like steel, electrical, tiling, those kind of stuff. So is it like -- is it like more volume at a better structure is what we have shifted to? Or is it that the quality of these commodities we have reassessed given the nature of the structure that's -- because these commodities driving such a steep increase in CapEx cost, honestly, as an outsider, it's difficult to completely triangulate. And secondly, one of your peers -- I know this question was asked to Steve yesterday also. But their CapEx with a similar capacity is nearly half of us. So any comment on that will be very helpful to understand how we are different versus our peer?
Yes, Steve.
Yes. So on inflation versus quantities, it is much more on the quantity side than it is on the inflationary side. I would say on the inflationary side, we had some views on cost savings that maybe were a bit ambitious, and that's coming back in now into the baseline here. But much more of it was the quantities as we started with a very low level of engineering and have built that engineering up on the same design. But on a very lack of understanding of, I think, the civil part, the soil conditions based on where we were at that has driven significant increases in quantities, as I said before, in civil work, tilings, concrete and then ultimately steel. And so you should think about this much more on the quantity side. It's not that we've increased scope of the plant. It's unfortunate we had a low level of engineering design done on the original estimate, and now we're at a high level of engineered design.
On the second question, as it relates to the competition. Again, as I said, yes, I won't really say much more, we can't speak to their estimates. We don't know their projects specifically. All we can do is reconfirm the diligence we put into our project and what we need for a large-scale project of this type. We have been in the aluminum industry for a long time, and we are just very comfortable at the levels we are at now, and I can't really speak to those.
So Steve, can you just -- out of this $4.1 billion, can you just highlight how much is civil and construction now? I think you gave -- earlier, you gave the breakup of the escalation in terms of 80%, 10%, 20%. But of the total number of $4.1 billion, how much will be civil and construction, any ballpark number you can share?
Yes. Give me a minute. We'll come back and answer that one.
The next question is from Ritesh Shah from Investec.
A couple of questions. Sir, first, I just wanted to understand what do we make of Inflation Reduction Act? I think there are multiple [ schemes ] over here, 48C, 45x. So I think Steve yesterday on the call did indicate that we could potentially qualify and we will answer about this in March. I'm just trying to get your thoughts basically, where do we stand over here? What sort of delta it can have? And if at all, there was this CapEx bump, which is there, which is a little unfortunate, but will this IRA be on, say, $4.1 billion and not $2.5 billion, and hence, there will be some positive [ rip off ] on basically the return ratio profile.
Yes. So on the first one, we have applied for the 48C under the IRA act. We think we have a very strong candidature for getting funds under this, but the decision will not be made ultimately on our application until, we believe, near the end of March. As we said yesterday, we have included nothing in this $4.1 billion associated with any 48C that would be granted to Novelis. Again, we're positive, but don't -- really can't tell you any directionally than what that could look like. Again, I will just repeat, we've done a lot of diligence around the $4.1 billion...
No, no, the question is, will the IRA amount change? Because it is from $4.1 billion...
No. The application is already in associated with what we've applied to and it's not -- it's always the subset of the overall number anyway. So that's more -- much more on the equipment piece and some other things. So it will not necessarily change the calculation of what we can get.
Okay. So fair enough. So basically, if I understood it right, the IRA benefit on the equipment part, it is not on the civil and construction part. So whatever benefit, if at all, we get, that doesn't change because of this $2.5 billion to $4.1 billion. Is that right?
That is correct.
Perfect. And the second question over here is what is the extent of benefit hypothetically, we can actually derive out of IRA? If I go through the fine print on the regulation, it says 30% ITC available on ABC, there are several variables over here. So should one assume 30% of, say, $2.5 billion or say, if $2 billion is the equipment cost, then should one assume 30% on, say, $2 billion?
You're reading the IRA correctly. But the last time this was done in the U.S., there was caps put in. So it's not easy to say that it will be 30%, it could easily be capped down. It can be any number of between 0% and 30%, and that's why we just can't give you a number right now. We should know here in the next 1.5 months.
Between 0% to 30%, that's useful. And I just want to crosscheck a data point. I think from the Alabama government, what we have got is around $135 million. Is that number correct, or what we pick up from the print media? Or is it something different?
It's -- we'll come back and confirm that number with you. I don't have it right at my hands right now.
Okay. This helps. Sir, my second question was specifically on the coal part when it comes to India. Can you highlight, sir, what is the status on Chakla as well as Meenakshi. I think Chakla earlier time line, what we had indicated was December '23, if my notes are correct, I just wanted to get an update on both the blocks? And how do I see...
December '24, not December '23.
Okay. I'll correct myself. And sir, on Meenakshi and I think there were 2 Meenakshis, right? So -- any update over there?
The Meenakshi West has been allocated to us, and it's sort of an exploration cum mining block. So we have already started the regulatory clearances, except from Meenakshi West. On Meenakshi, we are still waiting for the allotment. So that has not yet come through yet.
And sir, what is the EC for Meenakshi West? And if possible, time lines?
So Meenakshi West will take about 2.5 to 3 years, and it's about 5 million tonnes.
5 million tonnes. Perfect. And sir, lastly, just with respect to ESG, when it comes to Novelis, the carbon intensity has increased because of change in accounting over there. Any comments specifically over here? And given you also alluded that we have the optionality to go from 600 Kt to 1.2. How do we look at the UBC demand-supply equation specifically in North America or in U.S.? And are we looking at any specific change in regulations, which will ensure that there is adequate supply for UBC in the market?
Yes. So our carbon intensity is decreasing. So I just want to be clear with all the efforts we've put in and will continue to decrease as we commission and got through recycling facility another overall million tonnes of carbon out of the system with that. We will continue to increase the overall recycled content of our products, including pushes in beverage packaging, auto and other speciality products as well. So we continue on that journey. We're in line with meeting our more near-term targets of 30% reduction off the baseline in 2026. As it relates to legislation, we're working actively with associations with consortiums, with governments directly to find ways to increase the amount of used beverage cans coming back in. The U.S. has a low recycling rates at less than 48% over the last several years. And it's very clear when you look where there is some deposit schemes in place, the return schemes in place in those states, those recycling rates are north of 70%, and it's the remaining states that are dragging it down. So we will continue that. That will take time. But certainly, we're very active on that.
Sir, sorry, just I'll push one more. If I go through the last annual report, the carbon intensity for Novelis has increased actually from 4.44 to 5.34 to 6.19. And to my basic understanding what I got to understand, the quality of scrap, which we had processed, it was not of the right or optimal quality and that was one of the reasons where the carbon intensity had increased. That's the reason I specifically wanted to check on the scrap [ availability ], demand and supply. Are we comfortable over there?
No. It's probably more of a product mix than it is anything as we went through a shift in mix, but I can tell you that the intensity is coming down, and we can follow up on the specific questions that you might have with Megan.
Just to clarify, as the auto percentage goes up, the recycling rates are going down. And I think that's what you're talking about because the auto percentage has now gone to 22% when it was much lower than that. So the can is very highly recycled, but the autos, we still have the various initiatives to increase the recycling rates there.
[Operator Instructions] The next question is from the line of Indrajit Agarwal from CLSA.
I have a couple of questions. First, the projects that we do any greenfield, is it given out on a turnkey basis or do we operate it ourselves?
Yes. So in the U.S., with all the active construction, there is no turnkey at this point in time. We, as owners, will take on the risk associated with that. And we evaluated that at the beginning. We do have an EPCM firm in place, happened from the beginning and are still with us aligned with other experts as well, but it is owner's risk.
By the way, today's industry, there is nobody -- no big constructing firm that will take a turnkey EPC contract.
Sure. That's helpful. A couple of questions on the India business, housekeeping effectively. What was the external alumina sales this quarter?
The external alumina sales this last quarter was 167 Kt. And in Q4, we are expecting more like 180, 190 Kt of sales.
And that should be the run rate going higher, right, given that we have...
Yes, we have got more capacity. If you remember, we did the brownfield expansion. So we -- yes, that should be more or less -- 180 should be the average per quarter going forward.
Sure. That helps. And in Chakla, any guidance as to how much we can end up mining in FY '26? Can we...
Good question. I think we will do the box cut this year. So next year, we'll have to see how we can ramp it up. But I think at least in the first year, we should get past at least 1 million, 1.5 million in the first year.
Sure. And lastly, with the elevated CapEx in Novelis, does the $100 million upstream of cash that we had earlier guided for still holds or that can be pushed back?
So I think that we have kept the capital allocation framework as it is. I think $100 million doesn't move anything one way or the other.
The next question is from Satyadeep Jain from AMBIT Capital.
Just a clarification first. The engineering design was, as I understood, was done by some other firm and you got it done by some new firm recently. Can you maybe name the engineering design firm that you hired initially for the planning, and which is a new firm you've got it done with? And what is the EPCM firm that you employ for this?
Yes. No, we've had [ Fluor ] from the beginning all the way through, and they are still with us. My reference was that as we saw cost escalation, we wanted to have that audited by another firm. And so we brought another firm in to ensure that, that is -- that we're in the right ballpark here. So Fluor is still with as our EPCM.
Basically saying the engineering design -- the planning initially designed done by Fluor, they underestimated all the civil and construction cost by massively. Is that -- was it Fluor's initial planning that led...
No, no. It was a combination of us as owners and Fluor. We announced the project because of what Satish had highlighted, customer pull for new contracts. We moved quickly as a first mover into the marketplace, and we collectively as owners with Fluor went with a very low engineered design at that point in time.
In hindsight, we could have waited and done a much more detail and then given a CapEx number you can say.
Okay. Just the question on the return profile you mentioned for this capacity. I just want to maybe see if you can possibly quantify one of your peers, obviously, the one we keep talking about is talking about $650 million, $700 million EBITDA without recycling for a similar capacity range. Can we assume that or given you have recycling also in built into this, would $700 million for the -- is it possible to quantify that EBITDA you're building in for the return expectation? And secondly, the bridge between the EBITDA for the new capacity in the existing capacity, you did talk about higher can pricing. When we look at that $600 million, $600 per tonne EBITDA, what is the trajectory of pricing reset in the next 2 years, so that we get closer to that $600 million and the gap between the new capacity in the existing one closes.
Yes. So can you hear me clearly?
Yes, yes.
So Indrajit, let me just try and elaborate on all the questions that you asked. The return profile of the project remains attractive. Just as a reminder, we have said that this is a mid-teens IRR project. We are saying that it has dropped a couple of points, but it is in double digits and our confidence level of delivering double digits against a single-digit cost of capital is very high, number one. Number two, that when it comes to sort of talking versus what a competitor has declared, we will not get into that. What we can tell you is that we have got significantly higher pricing on this on top of a much lower operating cost as compared to conventional plan. This is a super-efficient plan compared to any cost benchmark of existing technology and existing plans. I'm telling you there were 2 things. One is a superior pricing. The other is a lower cost. And these two together make the return profile justifiable and attractive. On top of that, as Satish and as Steve both said that if you think about it in the longer term, and our track record even today shows that every time, that we don't create these projects for like 10 years or 15 years. We create them with a view that we should be able to expand capacity, and we know that we will need expanded capacity in not too distant future. This is not going to be the end.
It will be, again, a superefficient expansion at a very low cost profile per tonne. So when you bring all these things together, our confidence as sort of the emphasis on continuing and wanting to do this project remains very hard. That is what we can tell you.
On the pricing reset trajectory, given this is now going to commission in later half of CY '26 and you will have a lot of contract and reset before that, what -- can we...
We will be able to meet all that because we have interregional flexibility. I mean even today, North American capacities are out. I mean we are using interregional flexibility from Asia to be able to meet the demand of North American customers. And if you have to do that a bit longer, we can do it. We can flex capacity out of specialties, contracts because these are annual contracts, we will create the capacity because the return profile of these projects when contracts were committed and signed and we want to keep the -- we want to honor all the obligations to the customers. We are not going to compromise on that.
We have excess capacity in both Brazil and in Korea.
And we are really, even today, using Asia as a supply base for North America. So we are confident that we will not let down the customers on the time line. This is very manageable.
My question would basically the pricing reset you see on the existing capacity, you can see tightness and which is giving a higher pricing. When you look at the trajectory of resets in the next couple of years and that cadence of that $600 per tonne EBITDA, can it be -- what I'm trying to get is, can it be achieved before the new capacity comes online?
Yes. So we laid out as we got to the $525 sustainable EBITDA per tonne in the fourth quarter as we've guided. We also wanted to make sure everyone understood there's still margin accretion from the $525. And we laid out that we still have drivers of price that you're highlighting here, new capacities coming on recycling -- increased recycling content in our products, continued operational efficiencies, leadership in the growing automotive market. These are the drivers that drive us upwards of north of $600 that we talked about yesterday. As it relates to specifically the pricing, as Dev said, the pricing -- pricing of those contracts are already in place. And so as we serve those customers and those contracts kick in over the next couple of years, we will already see that before Bay Minette comes in. Now...
[indiscernible] Bay Minette commissioning, the prices just keep coming.
Right. The efficiencies of Bay Minette that Dev talked about come with the ramp-up of Bay Minette.
Okay. Just 1 quick question on the India alumina expansion. Given the experience with Aditya Mahan obviously, those were remote locations and coal challenges. And now the initial engineering design here. When we look at alumina expansion, it is right next to Utkal. Can there be confidence that the number you have given about $1 billion for that expansion will be fairly reasonable? And given the cost inflation in the balance sheet, you're looking at would there be a delay in that expansion?
So I'll tell you one thing that right now, the way we are learning from our lessons is we are actually doing the full detailed engineering before we even start the project in a big way. So currently, what's going on in Kansariguda is that we are doing the forest clearance, getting Stage 1, Stage 2, doing the R&R and doing the engineering. And I think that as soon as the engineering thing has come because when I give you my annual India CapEx outlook, then I will clarify exactly what -- how much we are spending.
The next question is from Pallav Agarwal from Antique Stockbroking.
So just on the level of domestic aluminum hedging, so how much are we hedged and at what rates?
As I said, in Q4, we have 22% hedged at $2,636 per tonne, and we have 50% of the currency at 85.19.
Okay. Also, I mean, we have given the guidance for FY '24 Novelis CapEx at, I think, $1.4 billion to $1.6 billion. But given you that the costs have escalated, so is there any phasing of the balance outlay out of the $4.1 billion over the next 2, 3 years, what levels of CapEx can we look at?
Yes. So good question. Let me just give you some guidance for your modeling. So in the next about 2 years, nothing has happened until the end of fiscal year '25 in terms of having to depend on any [ cash ] raise. But in the next, let's say, 2 years, we will raise some bridge finance, the CapEx will be higher, and it will come back with guidance. We typically give guidance on CapEx as we announce the full year. So we will come back with guidance. But obviously, the CapEx will be more elevated. But the guidance that I would like to give you is that -- as we end this year, we will be at a net leverage of below 2.5. Remember, we are at 2.7 now. We will fall below 2.5. And from there, with the increasing CapEx need and on which finance needs, we will elevate it up to around 3x that will come much later after about 2, 2.5 years. So that's the best guidance I can give to you now, assume that we will need to go around 3x on our net leverage as the project spending goes up. That's really the way to think and model.
Sure. And working capital, given that aluminum prices are rain bound. So we don't really expect, apart from any increase in volumes, working capital level should be broadly similar at this level?
I think we can assume that. And remember, if aluminum prices go up, our margins also go up. So basically, it works both ways. So we don't have any big concerns on that for the guidance that we have just given you on the net leverage.
Steve, there was one question that people had asked. Of the total $4.1 billion, what is the percentage of civil and what is the percentage of equipment and the rest?
Yes. So approximately 65% of the project costs approximately are civil and structural then you have equipment, obviously, that's going to make up about 25%, a little bit more EPCM costs, owners' costs and other direct costs, warehousing and other things.
The next question is from Vikash Singh from PhillipCapital.
Sir, I just wanted to understand, given that now we have an inflated CapEx on the Novelis side, does our plans on the India, for example, the Aditya Mahan brownfield expansion of the aluminum plant would take a backstage?
No, I would not say backstage. I think that see in India, we have actually quite a lot of strong cash generation. And I think that at this stage over the next couple of years, we -- in fact, in my prepared remarks, I said we will stay within our cash generation for our CapEx.
But that is more on the value-added side, right?
No, no. That's in overall. See, we now have -- we are sitting with about INR 11,000 crores INR 12,000 crores of treasury. Normal treasury that we should keep is about INR 6,000 crores, INR 7,000 crores. So -- and the cash generation that we have, we have a capacity to easily do a CapEx of about INR 6,000 crores, INR 7,000 crores a year without having to borrow.
Understood, sir. Sir, just one more question on the coal side. Given that some of the competitors are a little bit ahead in terms of reaching the full self-reliance, as per our plans, by when we think that we would be able to have a full captive coal we are expecting?
That's a good question. I think that probably it will take us at least 2 more years to get there. Now the only thing I will tell you is that overall, as more and more commercial coal comes in, Coal India prices and linkage prices are also going to stay soft. So I think overall, I don't think we'll be at a disadvantage when it comes to coal going forward. The biggest challenge for the aluminum industry is to increase the amount of green aluminum and hence, what percentage of renewable can you get in the mix? Because you have to remember, going forward, you're not going to be able to export aluminum if it's not low carbon.
Yes, that's correct. Sir, just one more on the follow-up side. Once we have Chakla, Meenakshi, all these ticking in. Do we have plans to surrender the 4 coal mines which we have purchased on this first round of auction, and that was very costly to us?
It's a good question. Thanks for reminding. So [ IV/5 ] has been legally returned and accepted by the government already. And Dumri has also been returned and accepted. So out of the 4, 2 already been written. So we have Kathautia and [ IV/4 ] remaining. The next one will probably return will be Kathautia.
The next question is from Kirtan Mehta from BOB Capital Markets.
Going back to the Bay Minette, a couple of more clarifications. Would you be able to also give a split of $750 million that we are targeting to spend by FY '24? And second question was, we have discussed about sort of the second phase of the expansion being done at $1,500 to $2,500 per tonne capital intensity versus the Phase 1, which is the net $6,800 per tonne capital intensity implied basis. So what are the specific components of infrastructure that has been created in Phase 1? Could you give a bit more color around that? And [indiscernible] civil infrastructure, what sort of the things that we are already doing in the Phase I, which will support lowering the capital intensity for the next phase?
Yes. So I'll answer that question, and then I'll let Dev come back to the $750 million. So in the $1,500 to $2,500, we've got many projects. You can see them on our slides over the history that we've been able to debottleneck the facility at much, much more efficient capital cost, what we've been traditional calling brownfield cost. The entire infrastructure layout of this is already in place, electrical utilities, land is already there. What need in a hot mill that has more capacity, and that's the most expensive part of all the equipment that we have. And so what we have to do is add either equipment in front of the hot mill or on the back end of the hot mill depending on what product mix we want to get out in order to get more capacity out of the hot mill. The biggest equipment piece when we really want to size itself will be an additional cold mill. But when you start to think about $1,500, $2,500, I talked about civil and structural in a percentage in a brownfield expansion, the equipment will be the majority costs associated with the expansion. That's why you can be so much more efficient in the brownfield debottlenecking. Hope that helps. Dev, do you want to...
And on the $750 million that we expect to close by the end of this fiscal, you can take it that this is the largest, the largest part of this is civil because right now, we are laying the foundation, tiling, we need the steel, we need the concrete. So for all processes right now, it is basically a construction stage -- civil construction stage project. And you can take it that almost the entire spend is towards civil and construction...
Down payment for equipment, and the down payments...
Yes, equipment down payment, but that's relatively small. So yes, civil and construction is a largest.
One more question on the India side, if I may. In terms of the EBITDA per tonne that you've clocked around $880 per tonne, do you think that this sort of the EBITDA run rate is sustainable over the next couple of years? Or is it sort of higher than the sustainable average that we are seeing?
Well, I hope it can go higher I mean at $880, and I think we can maintain this. See, right now, the costs are sort of -- we have got to some lower costs. I think now we need for the EBITDA to go up, the LME to move on. So really, right now, that EBITDA per tonne is more dependent on the LME than our cost structure. So I hope -- I think that over the next few years, all the projections of CRU and all do say that once the economies, geopolitical things get sorted out, both copper and aluminum prices should head up.
Or would the cost deflation make the aluminum price also sort of remain at this level, do you see that as a risk, by any chance?
No, I don't think the cost of aluminum drives the demand for aluminum. I think what -- I think the aluminum is a traded commodity. It's given by the LME trading, not from a cost plus basis. So I think it's supply and demand of aluminum that will drive the pricing of aluminum. As you see, supply demand is very tight, the inventories are less than 10 million tonnes, which is of 50 days of consumption. It used to be 90 before. So supply and demand is quite tight. I think it's negative overhang of geopolitical events, slowdown in Europe. These are sort of holding the commodity price.
We'll take that as the last question. Participants whose questions have not been answered or pending questions may get in touch with the Hindalco IR to have those questions answered. I would now like to hand the conference back to Mr. Pai for any closing comments.
Yes. I thank you for your attention. I do think that -- I do think that I want to reiterate that the quarterly performance that we just announced show the trend of quarter-on-quarter operational performance that we have been putting -- and I also do want to reiterate that whereas Bay Minette CapEx has gone up, let's not lose sight of the overall big picture. This is still a very good project. It's giving double-digit IRR, which is better than the cost of capital. And it gives us a platform that will cement Novelis' position as the largest aluminum player in the rolled products in North America.
So with that, I thank you for your attention, and wish you the best. Bye.
Thank you very much. On behalf of Hindalco Industries Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.