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Hindalco Industries Limited (HIL) belongs to Aditya Birla Group. HIL is the world’s largest Aluminium rolling and recycling company and a major Copper player and recognised as one of Asia’s largest producers of primary Aluminium. HIL is present throughout the manufacturing value chain from bauxite mining, alumina refining, coal mining, aluminium smelting to downstream rolling, extrusions, and foils. HIL acquired Novelis, Novelis acquired Aleris.
The company is the second-largest aluminium manufacturer in India, with capacity of 1,300 kilo tonne per annum (ktpa) of aluminium and 2,900 ktpa of alumina. It has a custom smelter with copper cathode capacity (including recycling) of 421 ktpa in Dahej, Gujarat
Mining activities:
- Coal mining
a. Gare Palma IV/4 mine in Chhattisgarh
b. Gare Palma IV/5 mine in Chhattisgarh
c. Kathautia mine in Jharkhand
d. Dumri mine in Jharkhand - Bauxite mining 27 leases in 4 states
a. Jharkhand
b. Odisha
c. Chhattisgarh
d. Maharashtra
Hindalco benefits from low cost of production for aluminium, with its smelters occupying first or second quartile position in global cost curves. The company also benefits from full alumina integration with captive bauxite mines, and stable coal cost with around 90% coal security through a combination of linkage from Coal India Ltd and captive coal blocks. However, high coal cost post deallocation of coal blocks and high cost of coal due to supply chain issues continues to suppress its profitability.
Cyclicality element of the business is in the manufacturing of base aluminium metal, due to adverse movement of aluminium prices which occurred during the 1st half of 2021. Also, the operating margin is susceptible to increase in raw material prices (coke, pitch, coal, etc) which the company may not be able to pass on to customers. There vulnerabilities are mitigated by conversion nature of Novelis and copper business, which contribute about 75 percent of consolidated EBITDA
Companies strategic direction is to focus on downstream value added products where intermediate processing is also carried out by HIL and subsidiaries. Recent investments are focused targeting end customer. These steps have partially removed the cyclicality in company’s financial performance.
Downstream:
Novelis, a 100% stepdown subsidiary of HIL supplies aluminium sheets and foils to the auto and transportation, beverage and food packaging, construction and industrial, and printing industries. Novelis is the world’s largest supplier of aluminium sheet to the automotive industry, with a global market share of approximately 50 percent and a manufacturing footprint where automotive demand is growing. The product portfolio includes high-performing alloys that are featured on more than 225 models in every application. As the growing material of choice for the automotive industry, aluminium offers a safe, sustainable and cost-effective way to lightweight vehicles that result in better performance. Customers include Audi, BMW, Tesla, Vovo, Mercedes, Hyundai etc
Aleris, a wholly owned subsidiary of Novelis manufactures aluminium rolled products and has 13 plants across North America, Europe and Asia, serving diverse industries like aerospace, auto, building and construction, commercial manufacturing and industrial manufacturing
Hindalco extrusions: Leading brand for a variety of industries including architectural, electrical, industrial, transport, defence and consumer durable industries. HIL’s extrusions are manufactured from billets made out of virgin in-house metal and offer the widest range of shapes and alloys. Some of the special alloys manufactured at this division are used in defence and space sectors.
The products from extrusion division are exported to countries like US, Canada, Germany, UK, France, Netherlands and other countries. The products that are evolving from this division include: Maxloader, aluminium body for truck, key advantage being lighter body weight. Eternia is a direct competitor for popular brand Fenesta making aluminium door and windows. Aluminium foils for maintaining freshness of food comes from this division
Copper Business:
HIL’s copper division operates one of the largest single location customs copper smelter in the world, produces copper cathodes, continuous cast copper rods in various sizes. Copper cathode is the primary raw material input for the production of copper rod for the wire and cable industry.
Industries that are being supported:
Power: Manufacturers of Conductors for Transformers, Generators & Power equipment, House wire Cables & Power Cable
Automotive: Wiring Harness, Casting Components, motors
Construction: Earthing, Plumbing, Building wiring
Railways: Electric locomotives, internal wiring, Signalling cables, Overhead conductors
Consumer goods: Copper is extensively used by FMEG companies
Consumer durables: Copper tubes for ac and refrigerators.
Birla Balwan: HIL’s phosphate fertilizers are marketed under this business. Birla Balwan brand is popular in the states of Gujarat, Maharashtra, Madhya Pradesh, Rajasthan, Chhattisgarh, Punjab and Haryana. This brand of fertilizers sold through private channels and various co-operatives and agro related corporations.
Since the company operates in more than 5 currency zones, we should be contingent that risk exists during high currency fluctuations. Exchange rate movements, particularly the United States Dollar (USD) and Euro (EUR) against Indian Rupee (INR) and Euro, the Swiss franc, the Brazilian Real and the Korean won against the U.S. dollar have an impact on HIL operating results. Currency fluctuation dynamics are as follows
In India in addition to the foreign exchange inflow from exports, the commodity prices in the domestic market are derived based on the landed cost of imports where LME prices and USD/INR exchange rate are the main factors. In case of conversion business, the objective is to match the exchange rate of outflows and related inflows through derivative financial instruments. With respect to Aluminium business where costs are predominantly in INR, the strengthening of INR against USD adversely affects the profitability of the business and benefits when INR depreciates against USD. The Group enters into various foreign exchange contracts to protect profitability. The Group also enters into various foreign exchange contracts to mitigate the risk arising out of foreign currency exchange rate movement in foreign currency contracts executed with foreign suppliers to procure capital items for its project activities. In Europe, where the Group has predominantly local currency selling prices and operating costs, it benefits as the Euro strengthens, but is adversely affected as the Euro weakens. For Swiss operations, where operating costs are incurred primarily in the Swiss franc and a large portion of revenues are denominated in the Euro, the Group benefits as the franc weakens but is adversely affected as the franc strengthens. In South Korea, for local currency operating costs and U.S. dollar denominated selling prices for exports, the Group benefits as the won weakens but are adversely affected as the won strengthens. In Brazil, where the Group has predominately U.S. dollar selling prices and local currency manufacturing costs, it benefits as the real weakens, but is adversely affected as the real strengthens.
Financials:
Cash from operating activity has been increasing
Net cashflow is -ve because of acquisition and partial debt repayment
Debt to Equity ~ 1
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- The company has delivered a poor sales growth of 5.97% over past five years.
- Company has a low return on equity of 7.18% for last 3 years.
- Company might be capitalizing the interest cost
- Dividend payout has been low at 10.03% of profits over last 3 years
Disclosure: Invested less than 2 percent of my portfolio, my views are biased. Not a stock recommendation
Note: Shortfall in aluminium due to restrictions on Russia is not an opportunity to buy