Hindalco Industries Limited (500440) Earnings Call Transcript & Summary

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Thank you, and a very good evening or morning, everyone. I hope you all are in good health. On behalf of Hindalco Industries, I welcome you all to this earnings call for the first quarter of FY '21. On this call, we will refer to the Q1 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 Q1 earnings presentation. In this presentation, we have covered the key highlights of all the businesses for the first quarter of the financial year '21 and a segment-wise comparative financial analysis of India and our overseas subsidiary, Novelis. All the prior period numbers have been regrouped and reclassified as per the Ind AS. On today's call, we have with us from Hindalco, Mr. Satish Pai, Managing Director; Mr. Praveen Maheshwari, Chief Financial Officer and CEO of Copper business. From Novelis' management, we have Mr. Steve Fisher, President and CEO; Mr. Dev Ahuja, Chief Financial Officer. I will now hand over the call to Mr. Pai for his opening remarks. Thank you, and over to you, sir.

Thank you, Subir. Good afternoon and good morning, everyone. Hope you all are staying safe and in good health, and thanks for joining today's conference call on Hindalco's first quarter FY '21 earnings. Let me provide you with a quick update on COVID-19 and then some key highlights of our businesses in this quarter. As the government is taking steps to normalcy by declaring the unlock phase, Hindalco is committed to ramping up its operations in sync with the prevalent guidelines and the current market demand. Our first and foremost priority is to protect the health and safety of our workforce across all our facilities. We have been taking and will continue to take several precautionary measures, which will remain in place until this pandemic crisis comes to a resolution. All our plants, including mines, are currently operational, in adherence with the guidelines of the government to stipulated staff limits, commuting norms and social distancing measures. All our aluminum upstream plants continue to operate near to full capacity, with all logistics infrastructure coming back on track. The export demand remains stable and continues to offset the current subdued domestic market conditions. All aluminum downstream plants have resumed operations at partial capacity on the basis of prevailing market conditions. The copper facilities are also ramping up to the optimal levels at the smelters, refineries and the value-added products. At Novelis, all plants are operational, and many are now running at their full capacity. All the automotive customers in North America and China are now pulling at nearly pre-COVID level. We continue to keep a close watch on all CapEx in India as well as in Novelis. We are also focused on fixed cost reduction and maintaining adequate liquidity across the businesses in the current environment. Coming to Slide 5. Here are some of the key highlights of our businesses for Q1 FY '21 versus the corresponding quarter of the last year. Despite the unprecedented macro environment, Hindalco delivered a steady and resilient Q1 performance in India as well as in Novelis. This was driven by good financial performance by the India aluminum business, supported by lower input costs and stable operations. Resilient beverage can sheet business and prudent cost control provided near- and long-term stability to Novelis in quarter 1. Novelis completed the acquisition of Aleris on 14th April, and the Q1 FY '21 results include the results of Aleris. The integration process has commenced, and we continue to work with relevant parties for the divestment of Lewisport and Duffel plants of Aleris. Novelis' China automotive plant achieved record shipments in Q1 on account of strong demand for all high-end vehicles, particularly the EVs. Net income from continuing operations without special items was at $22 million. Novelis registered an EBITDA of $253 million and an EBITDA per ton of $327 in quarter 1 of FY '21. Moving on to Hindalco's India aluminum business performance Q1 FY '21. EBITDA for the business was maintained at INR 856 crores, same compared to the quarter -- the same quarter of the previous year despite the unprecedented macro environment challenges. All aluminum smelters and major refineries have continued to operate despite the lockdown during the quarter. Aluminum metal production was at 291 Kt with a utilization rate of 90% for smelters despite COVID-related challenges. Metal sales was at 303 Kt in Q1 FY '21, regardless of the subdued domestic market because it was offset by higher exports. The cost of production was lower, supported by our thrust on fixed cost reduction, improved operational efficiencies and lower input costs. The EBITDA margin was at a healthy 19.3%, up 380 basis points, which continues to be one of the best in the industry. Value-added product sales was at 35 Kt, which was low due to the impact of lockdown. The Utkal expansion project of 500 Kt is on track and expected to start at the end of Q4 of FY '21. Turning to the Copper business quarterly performance on Slide #6. Copper operations were under a temporary shutdown due to COVID, leading to a significant drop of cathode production in Q1 FY '21 by 46% year-on-year. Metal sales was down 29% at 58 Kt, and CC rods sales were down by 51% at 31 Kt due to lower domestic demand, offset by higher cathode exports in Q1 FY '21. On the positive side, the fertilizer DAP sales volume was considerably higher in Q1 on the back of robust demand. This high volume was met through imports as our DAP facility is under planned maintenance shutdown. The benchmark TC/RC for calendar year '20 has settled at $0.159 per pound, which is 23% lower than the last calendar year. Also, sulfuric acid realizations dropped significantly due to lower demand. All these factors led to a lower EBITDA of INR 37 crore in Q1 FY '21. Now let's look at our quarterly consolidated performance for the quarter. Hindalco's consolidated business EBITDA was INR 2,813 crores compared to INR 3,730 crores in Q1 FY '20. PBT for the continuing operations before exceptional and special items, at INR 274 crores versus INR 1,718 crores in Q1 FY '20. The consolidated PAT for continuing operations before tax-effected exceptional and special items was at INR 139 crores versus INR 1,189 crores in the corresponding quarter of last year. Hindalco continues to maintain its strong liquidity and cash position with a total liquidity of $2.1 billion and a cash of $1.7 billion in Novelis and cash and cash equivalents of INR 8,717 crores in India at the end of June 2020. As on June 2020, the consolidated net debt-to-EBITDA stands at 3.83 versus 2.61 at the end of March 2020. Now turning to the broader economic environment on Slide 8. The global economy is expected to contract by 4.9% as per IMF's June WEO forecast. This will be the most severe recession since the Great Depression and even worse than the Global Financial Crisis, when world GDP contracted by 0.1%. However, IMF expects calendar year 2021 global growth to rebound to 5.4% year-on-year as economic activity revives due to relaxation and stringent lockdown measures, fiscal and monetary measures taken across the globe, with a strong recovery in the U.S., European Union, U.K., China, India and the ASEAN countries. The extent and the shape of the recovery, U, L, V, however, will vary in different countries. For example, China seems to be recovering much faster than the rest of the world. Moreover, the fiscal stimulus response and its implementation across countries will also be a big differentiator towards the road to recovery for individual economies. Many countries are still struggling to control infection rates. And hence, the impact on the economy going forward still remains uncertain. India's FY '20 GDP growth fell to an 11-year low of 4.2%, primarily led by manufacturing and construction sector weakness. IMF expects India's growth to contract by 4.5% in FY '21, owing to the stalling of economic activity as a result of the stringent lockdown measures imposed to counter COVID-19. However, the IMF expects this growth to rebound to 6% in FY '22. The manufacturing and construction sector has been severely hit and will recover gradually in a phased manner. The most severe impact of the lockdown is visible in the full Q1 of FY '21, as most monthly indicators are in the red in April and May, like the IIP, PMI, core index, car sales data. However, on the positive side, the government's commitment towards structural reform, Atmanirbhar Bharat package, and the easing of further restrictions in its unlocked phases will help revive economic growth in a calibrated manner. Visible signs of economic activity are returning as high-frequency data shows improvement in June, July. Citing this high-frequency data, the Finance Ministry has highlighted that the worst is already over, but has cautioned that economic recovery depends on how COVID infection curve evolves across the country going forward. Now let me take you through the aluminum industry overview on Slides 9 and 10. In the backdrop of COVID-19, global consumption in H1 2020 declined by 10%, the lowest since H1 calendar year '09, which was during the global economic crisis. The pandemic quickly intensified across the globe, compelling governments to initiate stringent lockdowns, resulting in large-scale disruptions to industrial activity. However, the governments worldwide have announced fiscal measures to the tune of $11 trillion or 12% of world GDP to limit economic damage and lift the financial sentiment. Despite a sharp drop in demand, production grew in H1 2020 marginally by 2% as aluminum, being a continuous process, makes it extremely expensive and time-consuming to start and to -- to stop and to restart. Subsequently, the market was in surplus of 2.8 million tons in H1 CY '20. Coming to world ex China. Consumption dropped by 30% year-on-year in Q2 CY '20, as lockdowns restricted industrial activities severely, resulting in the demand contracting sharply by 20% year-on-year in H1 CY '20. The overall markets were in surplus of 2.3 million tons, of which nearly 1.7 million surpluses were recorded in Q2 CY '20 alone. In China, the fall in consumption was sharper in Q1 CY '20 with 11% de-growth. But in Q2 of CY '20, with the backdrop of recovery in auto and building and construction sectors, the consumption grew by 5%. However, the overall H1 CY '20 consumption de-grew by 2% year-on-year. Thus, the Chinese markets were at a surplus of 1.8 million tons in Q1 CY '20 and a deficit of 1.2 million tons in Q2 CY '20, resulting in a relatively lower surplus of 0.5 million tons for H1 of CY '20. In an environment of weakening global demand and surplus inventory, the aluminum prices witnessed a sequential decline of 12% in Q2 CY '20 to $1,497 a ton versus $1,690 per ton in Q1 CY 20. In addition to the improvement in industrial activities in China, other global economies are gradually recovering. The impact of this recovery is seen in the recent improvement of aluminum prices in July 2020 by 10% to $1,639 per ton from an average of $1,497 per ton in Q2 CY '20. Coming to Slide 10 on the domestic industry. Q1 FY '21 has declined sharply due to the effect of lockdown across the auto/transport, building and construction and electrical sectors. However, the fall in demand was moderate in the packaging, especially pharmaceutical packaging, and industrial machinery, medical equipment such as ventilator. Since import data is not announced yet, the estimated imports, including scrap, de-grew by 58% year-on-year to 246 Kt in Q1 FY '21, while domestic scales was expected to decline by 55% year-on-year to 186 Kt in Q1 FY '21. The government's recent announcement of a stimulus package of INR 21 lakh crores and its thrust on infrastructure, housing and electrical sectors has lifted the economic sentiment and helped in the recovery of consumption. It has been observed that sequentially, there has been an improvement in domestic demand from June continuing into July and August. Looking at this trend, we expect Q2 FY '21 domestic sales to be better than Q1 as the economic activities pick up. Moving to Slide 11. The global FRP demand in the near term will remain soft in the cyclical end markets due to COVID pandemic. This demand is expected to decline around 9% in CY '20 versus the previous year. It is expected to bounce back with a growth of about 8% in CY '21 from the current year on demand recovery and the base effect. Industries like beverage and food packaging, pharma will lead this demand for flat-rolled products in the coming year. Continued resilience is seen in North America and Europe with improving trends in South America in the beverage can sheet demand, which held up during the quarter and is currently growing stronger. Higher at-home consumption favors package mix shift towards increased demand for aluminum cans. The FRP demand for the automotive sector is showing month-on-month improvement in the consumption of automotive sheets by the OEM in the last 2 months towards pre-pandemic levels. The demand for automotive body sheets in the U.S. is currently quite strong as major automotive OEMs have resumed operations in May and have started to rebuild their inventories. European demand is slightly behind the U.S. However, this demand is picking up slowly as the restarts of major automotive OEMs in this region has already begun. In China, demand for automotive sheets for EVs and high-end vehicles continues to remain strong, driven by lightweighting trends in the transportation segments. In the aerospace segment, the current demand is expected to remain low into the next year due to the reduced production and consumer travel. As travel picks up, it should drive the demand for FRP in the aerospace segment. This demand is supported by the high order backlogs from all global aircraft manufacturers. The domestic demand for FRP contracted by around a 46% in Q1 FY '21. This steep fall was due to a sharp decline in consumption in the sectors of transportation, building and construction and electrical sectors. Industries like pharma packaging, food packaging, consumer durables, et cetera, are likely to support the growth of FRP demand in India as the pickup in demand is clearly visible in June into July and August. Turning to the copper industry in Slide 21. In Q2 CY '20, copper consumption contracted by 5% year-on-year. In China, the consumption saw an upturn of 6% year-on-year, while the consumption in the rest of the world contracted by 16% year-on-year. Though the recovery in China has begun, copper consumption in the world, excluding China, is still suffering due to the COVID-19 pandemic. Comparing Q2 CY '20 sequentially with Q1 CY '20, the consumption grew by 14%. All of this growth has come from China that has increased by a massive 51% and bounced back to normal consumption levels of more than 3 million tons in Q2 of CY '20. Copper consumption in the world, excluding China, has declined by 15% in Q1 FY '21 year-on-year. In H1 CY '20, the global refined copper consumption declined by 6%. Consumption in China declined by around 3%, whereas in the world ex China, it dropped by 9%. Going forward, the uncertainties related to COVID-19 and other macroeconomic environments across the globe may impact the copper consumption in the second half of CY '20. On the copper concentrate side, COVID-related changes in work practices, supply chain disruptions, along with reductions in CapEx, will be a threat for future mine supplies across the globe. Spot TC/RCs are expected to remain under stress throughout the year, making the prevailing conditions tough for custom smelters in both the short to medium term. In the domestic market, post the complete washout of April '20, the overall refined copper consumption declined by 53% to 91 Kt in Q1 FY '21 versus 195 Kt in Q1 FY '20. However, we have seen a pickup in the domestic demand in the months of June, July and August. Market shares of the imports has decreased to 44% in Q1 FY '21 versus 46% in Q1 FY '20. Praveen will take you through the performance highlights of each of the business segments during quarter 1 of FY '21.

Thank you, Satish. Let us review our operational performance on Slide 15. As Satish mentioned in his opening remarks, Novelis completed its acquisition of Aleris and has already begun the work on integration of the 2 businesses. It is expected that the financial benefit of around $150 million per year would emerge from cost and strategic synergies. As a condition of the approvals given by the concerned regulatory authorities, Novelis is required to divest automotive assets at Lewisport in the U.S. and Duffel in Europe, which is currently under process. As the acquisition was completed on 14th April 2020, the financial results of Novelis and consolidated financial results of Hindalco for the quarter ending June 30, 2020, include the results of the acquired business of Aleris. The financials of the 2 automotive plants are shown separately as discontinued operations, and the net assets related to that -- those businesses are classified as held of sale. Although the financial performance of the combined business was impacted due to COVID, their strong customer relationships and unmatched footprint puts them in a good position to navigate the near-term uncertainty. Overall shipments were 774 Kt, including Aleris, in Q1 FY '21. Beverage can sheet shipments remained resilient and was down in only single-digit percentage points. Automotive shipments, on the other hand, were down 50% in Q1 FY '21 but is now displaying a strong pickup, particularly in China and the U.S. and gradually in Europe. Specialties shipment figures were higher as a result of the recent acquisition of Aleris compared to last year. All organic expansion projects in the U.S., China and Brazil for Novelis are progressing well. Novelis continues to focus on reduction in its fixed cost and CapEx while maintaining strong liquidity and balance sheet. Moving to Slide 16, related to the financial performance of Novelis. Novelis had a revenue of $2.4 billion, adjusted EBITDA of $253 million and an EBITDA per ton of $327 in Q1 FY '21. EBITDA was adversely impacted by lower shipments and unfavorable product mix, but this was partially offset by cost control initiatives and the contribution coming from the acquired Aleris business. Slide 18 shows the details of the performance of the Indian aluminum business segment. Alumina production in Q1 FY '21 was 623 Kt versus 686 Kt in Q1 FY '20. Utkal refinery produced 418 Kt alumina in Q1 FY '21. The aluminum metal production was 291 Kt in Q1 FY '21, lower by 11% Y-o-Y, with a smelter utilization of 90% despite disruptions due to COVID. Value-added products, excluding wire rods, production was down at 34 Kt in Q1 FY '21, lower by 57% due to subdued market conditions. Coming to Slide 19. Aluminum metal sales volumes were at the 303 Kt, lower by only 5% due to subdued domestic market but largely offset by higher exports in Q1 FY '21. VAP sales, excluding wire rods, were down 55% at 35,000 tons in Q1 FY '21 on account of the lockdown due to the pandemic. Moving on to the financial performance of the Indian aluminum business on Slide 20. This segment recorded a revenue of INR 4,436 crores versus INR 5,490 crores a year ago, lower by about 19% on account of lower global aluminum prices. EBITDA in Q1 FY '21 stood at INR 856 crores versus INR 853 crores in Q1 of last year. This was maintained despite unprecedented macro environment due to COVID. The EBITDA margin in Q1 FY '21 continues to be one of the best at a healthy 19.3% of revenue despite macro challenges. Moving to Slide 22. The overall copper metal production was lower by 46% Y-o-Y at 41 Kt in Q1 FY '21 compared to 76 Kt in Q1 FY '20, due to disruptions on account of COVID, leading to temporary shutdown of operations in Q1 FY '21. Quarterly production of CC Rods was lower by 60% Y-o-Y at 26 Kt in Q1 FY '21 due to lower domestic demand. Coming to Slide 23 on sales volume of copper, VAP and DAP. Copper metal sales were lower by 29% year-on-year at 58 Kt in Q1 due to lower production. CC Rods sales were also lower by 51% compared to the corresponding period of the previous year due to weaker domestic demand. DAP sales were up 3x in Q1 FY '21 at 102 Kt on the back of robust demand. These high volumes were made through imports as our own DAP plant was under planned maintenance shutdown. The financial performance of Copper segment is on Slide 34. Revenue stood at INR 3,031 crores versus INR 4,593 crores a year ago, down 34% Y-o-Y due to lower volumes and realization both of copper and byproducts. EBITDA stood at INR 37 crores in Q1 FY '21 versus INR 307 crores in Q1 FY '20, lower by 88% due to lower volumes, byproduct realization and TC/RC. Let's turn to our consolidated financial numbers for this quarter on Slide 26. Hindalco reported a consolidated revenue of INR 25,283 crores, business EBITDA of INR 2,813 crores, PBT for continuing operations before exceptional and special items at INR 274 crores and PAT for continuing operations before tax-effected exceptional and special items at INR 139 crores in this quarter. The detailed quarterly comparative financial numbers are attached as an annexure to this presentation on Slide 30. Hindalco India business reported a revenue of INR 7,464 crores, business EBITDA of INR 894 crores and profit after tax of INR 84 crores in Q1 FY '21. These details are provided as an annexure to this presentation on Slide 31. Let me now hand over the call back to Satish to give you a perspective on our key focus areas.

Yes. Thanks, Praveen. So let me conclude with some key focus areas, which is accelerating our value-accretive long-term growth and lowering the impact of LME volatility. Our foremost and top priority today is protecting our employees as well as the community from this infection with required health and safety measures. Our early preparedness and appropriate actions have helped us to manage this tough and uncertain situation well. These precautionary measures, along with our strong focus on business continuity while maintaining stable operations, running all the plants at optimal utilization and stable export markets, helped to mitigate the current challenges. Secondly, our relentless focus on stringent cash control as well as cutting down CapEx and targeting fixed cost reduction is helping us to maintain positive cash flows for operations. The cost competitiveness of Hindalco's mentors continue to position it in the first quartile of the global cost curve. The expected commissioning of the capacity expansion at Utkal Alumina Refinery by the end of this year will further reduce the overall integrated cost of production and will ensure future competitive readiness. The company is focused on cash conservation and maintaining adequate liquidity to sustain plant operations in the current environment. The strong balance sheet position in both India and Novelis with controlled leverage would help us sail through the current business environment to be the last man standing and the best man forward. Lastly, our resilient and sustainable business model of being more than 80% LME de-linked in terms of EBITDA, with the acquisition of Aleris, adds additional product diversification and has further derisked our business from metal price volatility. In the long term, our strategic investments in Novelis and Indian downstream expansions will also add to the derisking of the business and moving forward, creating a company with more predictable and sustainable cash flows. Thank you very much for your attention. And the forum is now open for any questions you may have.

[Operator Instructions] We have a first question from the line of Amit Dixit from Edelweiss Financial Services.

I have 2 questions. The first one is on consolidated financials in the -- in this presentation, Slide #30. We have unallocable income of minus -- sorry, expense of INR 454 crores. So is it possible to shed some light on that, that this is -- what is it? And because it was quite high compared to prior years.

Yes. I think I need to explain this part. Typically, for the Indian business, the income, it is actually the net income which comes here, which is -- which relates to largely our treasury income, net of the unallocable expenses, which is sometimes a little bit of corporate overheads and all that. So that is a little more than INR 200 crores. You can see it on the next slide of Slide 31. INR 244 crore is related to the Indian business. That's a positive number. And in case of Novelis and Aleris, that's the -- all the subsidiaries put together, the items which are not under -- in the EBITDA and the changes from the U.S. GAAP to Ind AS, they are coming here as a part of the unallocable expense here. That is close to about INR 700 crores. And there are many special items which are -- actually, you would have noticed in Novelis' results. Because their EBITDA, as we display here, is the EBITDA under U.S. GAAP as declared by Novelis so that investors and analysts don't get confused. So we've maintained that. And therefore, when you translate that into EBITDA as per Ind AS and after accounting for those special items, that difference is adjusted here. So that's about INR 700 crores here, and this includes many items. So for example, there is a metal price lag, which is not a part of the Novelis EBITDA, comes here. Similarly, there are some acquisition-related costs. Those are also coming here. These kind of things, which are a part of the unallocable expense, they are coming here as a part of the Novelis side. So the combination of these 2, about INR 700 crores positive -- INR 700 crores negative and INR 244 crores positive, that is showing up here as the unallocable expense. But many of these items, you will notice, are more like one-timers, and we don't expect this to continue. And sometimes, it could also be positive in the Novelis side. For example, metal price lag, which is a function of how the premiums work, could be positive in some cases. So this is something which is not in the EBITDA but fitting here.

Okay. Wonderful. The second question is on copper. So given that the first quarter copper sales have been quite low, so what kind of guidance can you give for rest of the -- for the whole year FY '21? And were there any hedging gains or losses in copper in this quarter?

Yes. So as we explained in Q4 as well, Q4 actually saw some derivative accounting, I would not say hedging gains. The hedging gains are a little different, which is the term we use for view-based hedges in aluminum business. These are not really gains or losses in real terms, but these are accounting noises that come between different quarters. And this happens because, I mean, we basically are offset-hedged completely in copper. So we should not make any gains or losses because of the movement of commodity and currency. But the point here is that the inflow or outflow or gains or losses on account of derivative side sometimes doesn't match timing-wise with the physical side. And therefore, in some cases, you see profits. In some cases, you see losses coming from this. So in case of Q4, if you recollect, we had said that more than INR 100 crores actually came in as accounting gains coming out of this derivative accounting. And part of that, about INR 70-odd crores, has actually come back as the last year, which we had already kind of predicted at that point of time it will -- it's going to come back. So it has hit us. So underlying EBITDA, you could say, at half our operations was about INR 100 crores or so in copper.

Going forward.

So going forward, our operations are going to be obviously full which was at about 50% operation now. I don't want to give you a specific number on EBITDA. But yes, our performance is going to be significantly better than Q1 going forward in copper business.

No, I was not asking about EBITDA, I was asking about production.

Yes. In production, we are at about -- our normal number is about 85 Kt per quarter, which is what we try to achieve, except in quarters where we have shut downs, which are planned. So Q2, there is no shutdown planned.

And in Q3 and Q4 as well, there are no shutdown?

There is 1 -- we have 2 smelters. One is a smaller one. The other one is a bigger one. Q3, we have a 20-day shutdown plan for the smaller smelter, as we call it, smelter 1. In Q4, we have -- part of Q4, 15 days of Q4, is planned for the bigger smelter, which will go into the Q1 of next year as well.

We have next question from the line of Indrajit Agarwal from CLSA.

A couple of questions. First, can you help us understand the aluminum COP -- integrated aluminum COP, how is that moved quarter-over-quarter in this quarter? And what is the trajectory likely to be going forward? Because in our numbers, it looks like a very sharp downtick in there.

Yes. So as I said in my remarks, I mean, the input costs -- basically, coal has been a very strong tailwind for us. So our input costs compared to Q4 is down by 6%. Now if you do your calculation, you'll probably see it more than 6%, but that's also because we had certain one timers that also benefited the aluminum business. So -- but I am stripping them out and saying that the integrated cost of production that will sustain was down by 6% versus Q4. Now I also think that we have really hit the bottom here because coal prices and all input costs have been at the bottom. So I think Q2 to Q1 will be flattish is my guidance now. So we have been going down between 3% and 5% every quarter since Q3 of last year. But I think now Q2 to Q1 will be flattish.

[indiscernible] Calculation. Maybe I'm calculating it wrong. In my calculation I see a double-digit decline. Is that correct? Or there is something more to it in terms of how the value-added business have changed, et cetera? .

So I'll let you take this off line, but I'll tell you that the integrated cost of production compared to Q4 is down by 6%.

Okay. That's helpful. And second is if you can help with the gross and net debt number at the console level?

So at the console level, the gross debt -- I'm going to convert the Novelis debt to rupees is INR 84,000 crores. And the net debt is INR 62,000 crores at the console level, largely now because we have about $2.8 billion coming with the Aleris acquisition. The net debt levels have not changed.

We have the next question from the line of Pinakin Parekh from JP Morgan.

Sir, just there has been a lot of noise and news about various import tariffs and we keep on hearing on aluminum. At this point of time, sir, has there been progress on increasing import tariffs on scrap imports or any other aluminum products as part of the government's local support to the local manufacturing?

No, Pinakin. There has been no real movement on import tariffs. Let me give you a little what has actually happened. So what they have done is they have started CVD against wire rods from Malaysia. They have started ADD initiation antidumping versus China and some ASEAN countries. And they have also, like steel, given -- started an import monitoring sell so all imports of aluminum in India now will be registered by the importer along with end use. But on a pure import duty increase, nothing has happened yet. The other one that the government is working on is RoDTEP, the remission of duties when you export. So they are trying to replace the MEIS scheme by giving a rebate on electricity duty, transportation charges. So that the commerce ministry is working on. A lot of things are actually happening. None of them have really come out yet. I think for us, the ones that have crystallized actually have been on the input cost side. So Coal India and the Coal ministry has taken some very dramatic steps in the months of April, May and June, that have really brought the cost of coal down.

Understood. And sir, my second question is the Value Added Production was, obviously, VAP was down sharply given the shutdowns, and it should normalize. Now as VAP increases, should we see premiums for the company of the domestic sales increase and thereby adding EBITDA to some extent because generally, this is higher margin, than pure ingot sales?

That's true. As the -- and I wanted to -- I said in my prepared remarks, June, July and now August is coming back to nearly 80% levels of what we were at January, February. And you're right that when they come in, then the domestic net realization, meaning domestic premiums, et cetera, is better than exports. So it will be additive to the EBITDA.

We have next question from the line of Hardik Shah from SBI Mutual Funds.

Yes. Just a couple of questions on the debt side. What would be the retainment obligations, standalone and consolidated?

So look, on the India side, we have no repayment for the next 2 years. The first thing that comes due is the INR 6,000 crores bond in FY '23.

And on the interaction side?

And on the Novelis side, Dev, can you take that question, please?

Yes, sure. So Hardik, our next maturity comes for the term loan, which is now outstanding at about $1.7 billion. That's the secured term loan, and that comes due in '22. So that's the first maturity. And after that, it is really the term loan that we have taken for the Aleris acquisition, which will come up in '25 of the $775 million, and after that is the '26 bonds -- 2026 bonds of the $1.5 billion. And then it's really 2030. These are really -- now within that, sorry, I should have said that we have the $1.1 billion bridge, which we will be refinancing in not too longer time or we will be, sort of, taking care of that so that the short-term nature of that, sort of, goes away. So this is really the maturity profile of the debt.

Okay. And secondly, sir, if my memory sale right, rating agencies had put a net debt-to-EBITDA cap of I think 3.5x post acquisition. And currently, we are at around 3.7x, 3.8x. So how -- when do you expect this to come down to be 3.5x?

So you're talking about the Indian rating agencies, right?

No. Correct. Yes. At the time of the acquisition, we had, I guess, company threshold.

No. So there is no threshold of any specific nature. But yes, they do expect the debts to come down and -- or EBITDA to go up, and that's what we will strive for. But today, there is no such threat on us for any downgrade.

And then let me just remind you, the -- what we had committed when we did the Aleris acquisition is that on closing, the net debt-to-EBITDA will get to 3.8% to 4%. Actually, it has reached 3.8%. And we said that within 2 years, we will bring it down to the low 3s, and we stand by that.

Sure. Sir, my final question, consolidated employee costs have gone up by 15%. Is it due to the Aleris impact?

Yes. .

We have the next question from the line of Vishal Chandak from Emkay Global Financial Services.

Yes. Sir, just wanted to understand what is holding back the approval from the regulatory authorities in China as well as in EU. We have been hearing for the last 2 quarters that probably it will come in next quarter or so. But really, we do not have a color on what was the reason why it's still not happening. So if you could just share some thoughts on that?

Steve?

Yes. No problem at all. We, obviously, submitted the approval of Liberty House as the buyer of Duffel in the middle of COVID-19. And there's been a number of issues that have arisen that have come up with discussions at the [ EEC ] and at the Chinese regulators. Yes, we do have approval, and we are actively working with the Chinese regulators and do believe that we'll be able to close this transaction with Liberty House within this quarter and are very confident that the Chinese regulators will come back over the next several weeks. .

The regulatory approval will come in this quarter itself? And by when can we expect the European approvals?

European is already approved. So we're just waiting on the Chinese one.

Okay. So they have already approved the Liberty House. And what would be the time line for any extension from the Department of Justice for the divestiture of the Lewisport plant as well, sir? .

Yes. So on the Lewisport plant, we, obviously, started that sale process after closing the larger transaction, Aleris, right in the middle of COVID-19. This requires carve out financial statements to stand up management teams. We are in the middle of that process, have good interest in the facility, and we continue to work with the Department of Justice to ensure that we are aligned to ensure that we find a suitable buyer for that facility, but we can't give any more specifics around time lines than that.

Yes. Lastly, just if I may squeeze in a small book-to-bill question in terms of what was the top line of Aleris included in the Novelis number in this quarter? I understand you did share the EBITDA as well as the tonnages pertaining to Aleris as part of a onetime understanding of the situation.

Yes. So what we've shared so far -- and Doug can -- if he has it at his fingertips, can talk about the top line revenue. In this quarter from April 14 to the end of the quarter, Aleris contributed 75 Kt in shipments and $34 million in EBITDA. I don't have the top line in front of me, Dev, I don't know if you do.

We have next question from the line of Bhavin Chheda from Enam Holdings.

Good set of numbers. Regarding domestic aluminum business, what would be the hedging proportion of volumes now? And at what price it is hedged? .

So for the remainder of this year, which is the next 3 quarters, we are 58% hedged at $1,720. And the currency is hedged at INR 75.7, 45%.

Sorry, sir. I missed your voice, if you can repeat it?

So the commodity is 58% hedged at $1,720 per ton. And the currency is 45% hedged at INR 75.7.

Okay. Okay. And any update on what would be the CapEx for '21 and '22 on the domestic side? I think the Novelis, you already announced $450 million, $500 million.

Yes. So no change in -- for the domestic, at least INR 1,500 crores for this year. Too early to give for next year. I think we'll look at how the second half of this year goes. How the LME looks and what we can afford. So this year, we have taken a dramatic cut to the original CapEx, and we are at INR 1,500 crores. No change. .

We have next question from the line of Satya Jain from AMBIT Capital.

I just want to follow-up on the hedging question, with the LME in steep contango, would you be looking at more -- actively looking at layering in hedges for FY '22? Just wanted to see your strategy for hedging for FY '22. And most the current hedge book for FY '22. .

Yes, that's what I was going to say. In FY '22, we are currently 15% hedged at $1,768, and the currency is 18% hedged at INR 78.5. So to be fair, the sudden run-up of the LME, we are taking a little bit of a pause. We have -- we want to -- any more additional hedges for next year need to be at $1,850 and above. That's where our approval limits start. So let's see how the LME runs up. If it crosses $1,850 current 3 months, then only we will add on. And if you remember, we normally like to be about 25% hedged by October, November for next year.

Okay. Second question, with the Chinese crop standards from July 1, do you see any changes, any more competition or extra scrap imports into other Asian regions or no impact as such.

Look, China has been restricting imports of scrap for a while now which is why there is so much scrap available, so much comes to India. The scrap spreads are good, which is good for Novelis. We don't see that situation changing, not because of China.

We have next question from the line of Sumangal Nevatia from Kotak Securities.

First question is just -- sorry to harp on this on the hedges part. I just want to understand the thought process in deciding the quantum because our basic understanding was we hedged 25%, 30% to reduce the risk on the cash flows, but 58% hedged is a bit of a surprise to us. It appears that we are taking a call on the commodity, and it's just not limited to risk management practice. I mean, how should we look at it?

So it's very simple. The year before, as I say, we will be at about 25%. But as we get into the year, that -- if you look at our historical, we have always come back to about 50%, 60% for the quarters that we are close by. So there is no change overall in the position. And this year, if you look at it 1 month ago, the $1,700 plus looked like a fantastic option. Of course, it has run-up now but I think it can always run back down. So we are now -- this year going to stop at this level and watch what happens to the market. But as a principle, we are 20% to 25% hedged by the previous October, November. And during the year quarters, we run it up to 50% if we feel so.

Understand. Understand. Sir, second question is with respect to the donation amount of $15 million, which was disclosed during the Novelis result, now, of course, there's no second opinion that it is an extremely generous gesture by the company. We did hear a few investor questions with regards to the quantum. Especially given that our previous years, it's been very limited for, I guess, single million -- $5 million, $6 million at Novelis and INR 25 crore, INR 30 crores at Hindalco annually. So any thought process -- I mean, is it like a one-off this year? Or has there been any calculation math behind it that in terms of our proportion to our profitability? .

I -- first, I don't think that this COVID pandemic has got any precedence with any of the previous years. I think it's been an unprecedented situation where I think the impact has been devastating. So I think that this is following the culture and the values of the Birla Group. So we think that this is something taking into account the current environment that we have decided to do. And I certainly hope that we don't get into a crisis like this going forward in the future. But we felt that in this environment is under these very extreme pandemic situation, we felt that we had to do our part. And I guess that's it. There's no math involved, it's only art.

It also shows the confidence that we have in terms of our own performance going forward.

Yes.

And sir, is it -- I mean, since it was do. Ne through Novelis, is it in international geographies or in India as well? .

It's both. I think Novelis has put it into a worldwide charity that has invested in all the places that we operate in. So we wouldn't want to go and break it down by country anymore. .

We have next question from the line of Rajesh Lachhani from HSBC.

My question is regards to the aluminum segment. So you said there are certain one-offs in the aluminum cost. So could you just throw some light on what were those one-offs? And are these recurring or nonrecurring?

So look, the largest part of the one-off was there was a little bit of a write-back because of the RPO obligations that we had got from the [ paaa ]. So that was the only one really. So I don't -- we'll -- there are more RPO obligations that we have on the books that may come back over the next 3 quarters. Because you see the whole RPO rule has changed. I think some of our competitors have taken everything at 1 go, but we go state-by-state as the states notify. So that is why when I do the cost of production and stripping that off, Rajesh.

Understood. Understood, sir. And sir, on -- just to follow-up on the Duffel divestment. We still don't know what is the exact reason why this divestment is still not getting the approval of the standing regulatory authorities. So can you just tell us, is it some formal delays or there are certain sticky point where the divestiture has been stuck?

I'll let Steve handle. Steve?

Yes. No, there's nothing more specific than this is just taking time in COVID. As they assess the suitability of Liberty House over time. Again, we feel as though the Chinese regulators are nearing the end of their review and we believe that we will get the closure of this transaction within this quarter. .

So there is no risk to this [indiscernible] at all with regards to regulatory approval.

No, no. I stand confident, but it's not approved yet. And until something is approved. I would never say there's no risk to that. But again, in our discussions, in our understanding of where they are, we feel confident that we will see approval of the transaction.

We have next question from the line of Abhijit Mitra from ICICI Securities.

The question pertains to Novelis. Actually, the balance sheet highlights that almost $1.4 billion has been put aside as assets set for sale. This includes current as well as non-current assets. So what we wanted to understand is that there seems to be a fair bit of inventory and the asset estimate that you've put in, the acquisition price that you have paid? And if you can share that the bids that you've got after how much higher or to what extent is different from the value that you have put in there? .

Steve, Dev?

Yes, I can take that. So first of all, you're able to hear me?

Yes.

Yes, I can hear.

Are you able to hear me? All right, sure. Okay. So first of all -- so when we do the accounting of purchases, there are rules that we have to follow in terms of step-up of the values. And so therefore, to your point about inventories, we have to step up the inventories to their market value, finished codes, web, et cetera. And so that does inflate the value of the inventories. You will see that one of the things that we have done is taken a one-off effect. So that's part of the one-offs in the net income, where we have stepped it back down and we have readjusted it. But basically, as part of the purchase price accounting, acquisition accounting, these are some of the things that come with it. And even otherwise, all the assets are basically stepped up to market value. All the contracts, customer contracts are valued as part of intangibles acquired and so on. So everything has been done based upon the right accounting rules, our GAAP ROE. So that's something that you need to know. I mean, at the end, the core point here is that the net goodwill, as you will see, is a little above $300 million, which represents sort of the purchase consideration versus the asset values. And for an acquisition of this size, as you can imagine, the goodwill is not so outside. So overall, the acquisition has been done for a little lower than $2.8 billion, rounded to $2.8 billion, that's really the acquisition cost. So that's really how I can explain.

Right, right. Yes. So that's helpful. So the way to understand is that for an outsider, that the price -- at least the price that you should expect, right? I know it's difficult to sort of put words into your mouth, but for an outsider, understanding that's the way to look at it, right?

I think that you have to just understand that some of it is going by accounting rules. So I mean, there's a difference between economics and accounting rules. So we would speculate -- we wouldn't speculate and try to sort of link the two. There are many other factors when it comes to divestitures. So I wouldn't try to link the accounting values and there are many rules and complexities that get into that. So the best thing is to refrain from trying to, sort of, compare the economic and the accounting side. .

We have next question from the line of Pallav Agarwal from Antique Stockbroking.

So I just had a question on -- could you share the Utkal EBITDA separately for this quarter? .

No, because we don't give out Utkal EBITDA because it's fully integrated. All Utkal alumina goes into our metal. So we do -- we don't give out the EBITDA of Utkal separately. It's fully integrated into the aluminum business. If we do sell alumina on the third party, I will call that out for you in the quarter. But the alumina that's used internally in our aluminum, we don't give out the EBITDA for that because it's built into the aluminum EBITDA.

Sure. So also, I want your views on alumina as a percentage of spot aluminum. You've seen a pretty sharp run-up in aluminum on the revenue. But having prices still as a percentage of aluminum probably below 16%. .

I think that the linkage as a percentage of LME was broken a couple of years back because alumina has its own supply demand equation, number one. Number two, the third-party alumina market is not very big anymore. Most of the players are backward indicated. So it's driven a lot by what happens with Alunorte of Norsk Hydro. When their supply goes up and down. So right now, the alumina prices are like $250, I think, which is quite low. So there is -- assuming that there is sufficient third-party alumina available. So I would not -- we don't look at alumina as a percentage of aluminum anymore. That linkage is broken. It's got its own supply-demand equation now.

Okay. So. And also, I mean, I missed the part for the RPO obligation. So what -- could you share what is the quantum of write-back this quarter in [indiscernible]?

So it's basically revaluation of the obligation that was there because the rates have come down. It's -- I mean, it's about INR 30 crores in this quarter. We don't expect this to just repeat every time because we obligation has been already reduced to the current level. It depends on the trading prices of [ REC, actually ].

Okay. So this may not be a recurring feature?

No, no, it's not recurring. It's not recurring.

That's why we called it out separately saying that this is a one timer.

Sure. So I mean, but apart from that, our fuel costs have released substantially. So I'm guessing is also because copper production was lower. So would that also have reduced the power and fuel cost in this particular quarter?

See, if you're looking at power and fuel costs on a console basis, a large part of that reduction is also because Novelis power and fuel costs were down. Because the automotive plant was shut down in April and half of May. So overall, there has been quite a big reduction in power and fuel costs in Novelis during Q1.

Okay. So, would that be available with production come back?

It will come back. Yes.

Okay. So finally, sir, could you give us some idea of what fixed cost savings can sustain? Can we look at something -- a reduction going ahead for the rest of ...

Yes. I think that -- Steve, you have already -- yesterday, given the Novelis target, right? Or Dev, if I remember, right? Can you just repeat that? What Novelis is targeting?

Yes, sir. Yes. So let me give you a view on that. So first of all, we have said that in this year, we are prepared to save over $250 million. And why I'm saying we are prepared is that depending upon how the market comes back. Because if the market comes back, the focus will be on really selling more -- producing more and selling more and sort of that will be a better thing to do than just focus on pure cost savings. But we'll be ready to push cost savings target of $250 million and we made a very good start. I said in our Novelis call that in 1/4 of the year, in 1 quarter, we've already achieved 1/3 of the savings. Now I think your question was on sustainability and how things look going forward. So really, I think that the part that we will be able to sustain is really the SG&A part, where we are driving some very fundamental actions to really address some of our fixed costs. So that would be a part that will sustain. So I would say that out of the $250 million, a lot of the costs are relating to power and employee costs, which, sort of, has come back because our operations will resume, some of these costs will just come back. In short, I would say that in the SG&A side, about $30 million -- $30 million to $40 million could sustain, which also has some benefits of integration of the total $150 million integration or thereabouts. So it also has some play on this one. But most of the costs will go back as operations resume. That's really the way to think about it. .

And in the India business, we are targeting about INR 800 crores, INR 900 crores fixed cost reduction this year.

Of which you have already seen something in the [indiscernible]?

Actually, Q1, the reduction has been much higher than the run rate because some of it is timing related. We did not do a couple of pot relinings. And so the run rate savings in Q1 is very high. But I think that during the rest of the year, as Dev was saying, as operations pick back up, some of our costs will go up. But throughout the year, we are expecting to reduce by INR 800 crores, INR 900 crores. .

Ladies and gentlemen, that was the last question. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Yes. So thank you. I think that, in many ways, this was quite an extraordinary quarter with the full impact of COVID being seen on all our worldwide operations. And I think that what is amazing is that our employees have done a stellar job in keeping our operations running. And helping us deliver quite a resilient result group -- set of results in a very difficult time. . I think that now going forward, we will build on this as for the economies come back. And hopefully, we will be doing much better in the quarters coming forward. So with that, I thank you for participating in this call and for your questions. Thank you.

Thank you very much, sir. Ladies and gentlemen, on behalf of Hindalco Industries Limited that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.