Hindalco Industries Limited (500440) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Hindalco Industries Quarter 2 of FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Subir Sen from Investor Relations of Hindalco. Thank you, and over to you, sir.

Thank you, and a very good evening or morning, everyone. I hope you all are safe and in good health. On behalf of Hindalco Industries, I welcome you all to this earnings call for the second quarter and first half of FY '21. On this call, we will refer to the Q2 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 Q2 earnings presentation. In this presentation, we have covered the key highlights of all the businesses for the second quarter of the financial year '21; and a segment wide comparative financial analysis of India and our overseas subsidiary, Novelis. All 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.

Yes. Thank you, Subir. Good afternoon, and morning, everyone. Thanks for joining today's conference call for Hindalco's Q2 earnings. So I also hope that you and your families are safe and healthy as we continue to manage through the challenges associated with the pandemic. 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 has some resolution. Coming to Slide #5. Here are some key highlights of our business for Q2 FY '21 versus the corresponding quarter of the last year. Hindalco delivered an outstanding performance in Q2 across all businesses, backed by stability in operations and enrich product mix and an upward market trajectory. The results were driven by a strong performance by Novelis and the India Aluminum business, supported by higher volumes, better product mix, lower input costs, stability in operations and cost savings. Novelis recorded an all-time high quarterly shipment of 923 Kt, up 11% year-on-year due to the acquired businesses. This revival is attributed to the recovery in the automotive and the building and construction markets operating now at mostly pre-COVID levels during the quarter and continued resilience in the global beverage can market. Novelis achieved an all-time high EBITDA of $455 million as well as an EBITDA per ton of $493 million on the back of higher volumes, strong market demand, coupled with good cost control and product mix. Net income from continuing operations at $144 million, up 17% year-on-year, while net income, excluding special items stood at $158 million in Q2 of FY '21. Novelis completed the acquisition of Aleris with the divestment of Duffel's in September. And over the past weekend, signed an agreement with American Industrial Partners, a private equity firm, to divest the Lewisport auto body sheet business in the U.S. for an estimated net cash proceeds of $171 million. The details of which are already covered in the Novelis quarterly earnings material and the con call yesterday. The net loss, net of tax on the divestiture recorded at $170 million. As Steve mentioned on his call, while we are disappointed, as we did not receive value as expected for the divestment, we have to now move forward and focus on the path ahead. Novelis already realized benefits from the acquisition. In some cases, more than what we even expected and is better positioned than ever for long-term sustainable growth. The integration work continues with $38 million annualized run rate synergies already achieved with a potential of $120 million in these synergies. Moving on to Hindalco's India Aluminum business performance in Q2 FY '21. Business EBITDA for the Hindalco Aluminum business was up 32% year-on-year, at INR 1,066 crores compared to the same quarter of the previous year on account of favorable macros and lower input costs. Production at Utkal was at a record high of 441 Kt. Metal sales were lower at 303 Kt in Q2 FY '21, and was flat sequentially. Value-added product sales were at 63 Kt in Q2 FY '21, lower on a year-to-year basis, but grew sharply by 81% on a sequential basis with the revival of the domestic market in Q2. Our thrust on fixed cost reduction, better operational efficiency, supported by lower input costs continues to help in keeping the cost of production low. The EBITDA margin was at a healthy 22.2%, up 780 basis points year-on-year, which continues to be one of the best in the industry. The Utkal expansion project of 500 Kt is on track and expected to start in Q4 of FY '21. Turning to the Copper business quarterly performance on Slide 6. Cathode production reached 73 Kt from 41 Kt in Q1 FY '21, after the ramp-up of operations post recovery from the Q1 disruptions due to COVID. Metal sales was at 75 Kt as the market recovered in Q2. The CC rod sales were up at 64 Kt, up 2% year-on-year as the domestic market for rods recovers. DAP sales volume was at a record high of 127 Kt, 143% year-on-year, on the back of robust demands due to the good monsoons. EBITDA in Q2 FY '21 recovered to INR 208 crores sequentially. Coming to the quarterly consolidated performance for the quarter, Hindalco reported an outstanding operational and financial performance in Q2 FY '21. Hindalco consolidated business EBITDA was up 25% at INR 4,672 crores compared to INR 3,742 crores in Q2 FY '20. PBT for continuing operations before exceptional and special items was at 24% year-on-year at INR 2,497 crores in Q2 FY '21. The consolidated fact for continuing operations before tax-affected exceptional and special items was up 42% year-on-year at INR 1,784 crores in Q2 FY '21 versus INR 1,253 crores in the corresponding quarter of the last year. Hindalco continues to maintain its strong liquidity and cash position, with total liquidity of $2.6 billion and a cash of $1.6 billion in Novelis, and a cash and cash equivalent of INR 8,235 crores in India at the end of September 2020. As on 30th September 2020, the consolidated net debt-to-EBITDA stands at 3.52x versus 3.83 at the end of 30th -- end of June 2020. Turning to the broader economic environment in Slide 8. As per IMF's latest outlook, global growth is projected to contract by 4.4% in calendar year '20, and expected to rebound to 5.2% in calendar year '21. Except for China, the GDP in most advanced and emerging economies is expected to contract in calendar year '20. China is expected to expand by 1.9% year-on-year in calendar year '20. China's recently concluded 14th 5-year plan targets that its GDP doubles by calendar year '35, implying an average growth rate of 4.7% over this period. On the other hand, the U.S. economy is expected to contract by 4.3% in CY '20, affected by the pandemic. While Joe Biden's presidency is expected to bring in some more policy predictability, the impact of a divided congress, likely Republican control in the Senate, on the president-elect's plan of a huge fiscal stimulus package will be closely watched. Globally, current trend is of economic expansion. However, large sectoral and regional divergences in the growth trajectory exists. Strong fiscal support of around 15% of the world's GDP has prevented an economic catastrophe. However, the growth trajectory will depend on the path of the pandemic, public health response and the extent of associated domestic activity disruption. The second wave of infection across Europe, geopolitical tensions and trade frictions, deteriorating for fiscal positions of governments are downside risk to the growth. The impact of surge in COVID-19 infections on economic activity was clearly visible in Q1 of financial year '21, with India's GDP growth contracting by 23.9% year-on-year. However, most lead indicators like PMI, auto sales, rail freight traffic, GST collection suggest that the economic recovery is underway in Q2 of FY '21. And the worst seems to be over. RBI expects growth to turn positive in Q4 FY '21, 0.5%, with the recovery starting in Q2. RBI projects FY '21 GDP to contract by 9.5%, however, with growth rebounding to 10.1% in FY '22. Recovery is expected to be uneven with different sectors recovering at different speeds, contact sensitive sectors suffering the most. While the COVID curve is flattening, risk of a second wave could dampen economic recovery. The RBI in its latest monetary policy review kept policy rates unchanged, but continued with its liquidity boosting measures to support demand. RBI expects inflationary pressures to subside in H2 of '21 as supply chain disruptions dissipate. Now let me take you through the aluminum industry overview on Slide 9 and 10. The global consumption growth year-to-date in calendar year '20 declined by 8%, the lowest since the global financial crisis. However, governments worldwide have announced fiscal measures to the tune of $11 trillion or 12% of the world GDP to limit economic damage and lift the financial sentiment. Despite a sharp drop in demand, the production year-to-date in calendar year '20 grew marginally by 1% as aluminum being a continuous process makes it extremely expensive and time-consuming to stop and start. Subsequently, the market was in a surplus of 3.2 million tons year-to-date in calendar year '20. China's consumption was flattish year-to-date as the economy picked up in Q2 and Q3 of calendar year '20. Coming to the world ex China, the consumption contracted by 17% year-on-year -- year-to-date calendar '20 as the lockdown restricted industrial activities severely, leading to a surplus of around 3 million tons. In Q3 calendar year '20, the global consumption declined by 3%, leading to a surplus of only 0.5 million tons. In China, in the backdrop of recovery in auto and building and construction sector, the consumption grew by 3% year-on-year in Q3 calendar year '20. Hence, there was a marginal deficit in Q3. In respect of the world ex China, the consumption degrew by around 10% year-on-year due to a slowdown. Thus, world ex China markets had a surplus of 0.7 million tons in Q3 calendar year '20. In an environment of improvement in industrial and economic activities in China and the gradual recovery in other global markets, the aluminum prices recovered sharply by 14% to $1,704 per ton from an average of $1,497 a ton in Q2 calendar year '20. In October 2020, the global aluminum prices continued to improve to $1,803 per ton. Coming to Slide 11. On the domestic industry, Q1 FY '21 showed signs of recovery with the sequential growth of 25% as the September 2020 demand was 90% of pre-COVID levels versus September of 2019. The demand in Q2 FY '21 is estimated to decline by 25% year-on-year, while domestic producer sales will decline by 10% year-on-year. Consequently, the share of domestic producers has increased to 50% in Q2 FY '21 versus 41% in Q2 of FY '20. The estimated imports, including scrap, degrew by 35% year-on-year to 358 Kt in Q2 of FY '21. The government stimulus package of INR 21 lakh crores, and it's trust on infrastructure, housing and electrical sector that lifted the economic sentiment and helped in the recovery of consumption. Automotive sales are picking up in the backdrop of a resilient rural economy and the changes in mobility in the post-COVID period. In building and construction, there is an expectation that workers would be back after the festival. Hence, we would expect that demand should recover in Q4. Packaging demand has continued to remain robust with growth in pharma and flexible packaging. We are observing times that the demand for electrical power is gradually reviving. Overall, we estimate the domestic aluminum demand should be back to pre-COVID levels by the end of Q3. Moving to Slide 11. The global FRP demand is expected to decline by around 7% in calendar year '20 versus the previous year. It is expected to bounce back with a growth of about 8% in calendar year '21 from the current year on demand recovery and the base effect. Industries like beverage, food packaging, pharma will lead this demand for flat-rolled products in the coming years. Beverage can continues to show its resiliency, benefiting from higher at-home consumption that favors the package mix shift towards increased demand for sustainable aluminum cans in North and South America. In South America, the shift towards off-premise consumption has driven the share of aluminum cans as a package type for beer to 61%, up nearly 10 percentage points in just 1 year. Customer demand remains generally resilient in Europe and Asia as well, but facing some challenges, mainly related to the reduced tourism. The FRP demand for the automotive market in the U.S. and Europe saw a very sharp recovery in our second quarter after several week shutdown by major automakers in early spring due to COVID-19. The demand in the U.S. is strong as most of the auto OEMs are now operating at almost full capacity and has started to build inventories. We also saw a recovery in Europe in Q2 after spring shutdown. In Asia, EVs, high-end SUVs and luxury demand for auto sheets remain strong. The near-term order book also remains strong with capacities running at their upper limits. Aerospace remains muted in the quarter and is expected to remain soft well into next year, as OEM reviews bill rates due to lower consumer air travel. As travel picks up, it should drive the demand for FRP in the aerospace segment. In India, the FRP demand in Q2 FY '21 is estimated to recover by 35% sharply quarter-on-quarter, while it degrew about 23% year-on-year in the corresponding period of the last year. This demand is recovering in the backdrop of stable uptake from pharma and food packaging, improvement in transportation demand and demand for consumer durables, supported by increasing penetration of e-commerce sales across India. However, the B and C demand also is recovering and is expected to reach pre-COVID levels by Q4 FY '21. Turning to the copper industry on Slide 12. Global refined copper consumption declined by 5% year-to-date calendar year '20 compared to calendar year '19. China has fully recovered from the COVID-19 impact and grew by 1%, whereas the world ex China still recovering with 10% decline in consumption compared to last year. In Q3 calendar year '20, global refined copper consumption recovered to 98% of Q3 calendar year '19 level. In China, consumption saw an upturn of 6%, whereas consumption in rest of the world contracted by 10% year-on-year in Q3 calendar year '20. In calendar year '20, refined copper consumption is expected to recover to 97%, 22.5 million tons of last year's level of 23.3 million tons. China has already recovered to the pre-COVID levels and is expected to see the overall growth of 2% in refined copper consumption in calendar year '20. In contrast, the world ex China is expected to see a decline of 9% in calendar year '20. On the copper concentrate side, mine output in terms of copper concentrate has declined by 5% in Q3 calendar year '20 compared to '19. The deficit in the concentrate market has more than doubled to 170 Kt in Q3 calendar year '20 compared to 80 Kt in calendar year '19, which has led to continuous tightness on the spot TC/RCs. On the domestic side, the refined copper market in Q2 FY '21 reached to 77%, 147 Kt of the Q2 FY '20 level of 190 Kt. On a quarter-on-quarter basis, the market jumped by 62% in Q2 FY '21 compared to 91 Kt in Q1 FY '21, as major copper consuming sectors recovered to the pre-COVID levels. Post the CVD imposition of imports from ASEAN countries, market share of imports have continued to decrease to 25% in Q2 FY '21 compared to the corresponding period of the last year. Now Praveen will take you through the performance highlights of each of the business segments during quarter 2.

Thanks, Satish. Let us review our operational performance, starting with Slide 15 for Novelis. Novelis did remarkably well in terms of its operational as well as financial performance of the combined businesses of Novelis and Aleris. The strong customer relationships and unmatched footprint put Novelis in an excellent position to navigate their businesses through the near-term uncertainty arising from pandemic. Novelis achieved an all-time high level of shipments of 923 Kt in this quarter, up 11% Y-o-Y and 19% sequentially. Beverage can sheet shipments remain very strong and resilient, and were up sequentially as well. Automotive shipments, on the other hand, doubled from the preceding quarter as the market revived with a strong pickup, particularly in China and the U.S. Specialty shipment figures were also up significantly, on a sequential basis, as a result of revival of demand, particularly in the B and C segments. Satish has already covered the update on the divestitures related to Aleris acquisition and the synergies already achieved. As these divestments are behind us, we can now focus on the integration and value capture in the continuing operations. All organic expansion projects in the U.S., China and Brazil are progressing well; and commercial operations are expected to commence in the next about 6 to 12 months in these projects. Moving to Slide 16, and presenting the best ever quarterly performance by Novelis, the company had a revenue of $3 billion, up 24% sequentially on the back of higher shipments, LME and premiums. It achieved record adjusted EBITDA of $455 million, up 80%, and EBITDA per ton of $493, up 15 -- 51% sequentially on the back of higher volumes, good cost control, better product mix and EBITDA contribution from the acquired Aleris business. Slide 18 shows the details of the performance of our Indian Aluminum business segment. Alumina production in this quarter was 705 Kt versus 623 Kt in the previous quarter. Utkal refinery recorded its highest ever quarterly aluminum production of 441 Kt in this quarter. The aluminum metal production was also higher by 5% sequentially at 307 Kt in this quarter. VAP production was higher by 81% sequentially at 62 Kt in Q2 FY '21, with a sharp recovery of the market in this quarter. Coming to Slide 19. Aluminum metal sales volumes were flat at 303 Kt sequentially. The share of domestic sales, however, was 36% in this quarter compared to 20% in the previous quarter. VAP sales were up by 81% at 63 Kt in this quarter on account of sharp recovery of the domestic market compared to the last quarter. Moving onto the financial performance of the Indian Aluminum business on Slide 20. This segment posted a revenue of INR 4,796 crores in this quarter versus INR 4,436 crores in the preceding quarter, reflecting a growth of 8% quarter-on-quarter on account of higher aluminum prices. EBITDA was up 25% sequentially at INR 1,066 crores versus INR 856 crores in the preceding quarter on account of favorable macros. The EBITDA margin continues to be one of the best at a healthy 22.2% of revenue, up 290 basis points quarter-on-quarter. Coming to Slide 22, the overall copper metal production was up 76% sequentially, at 73 Kt, in this quarter as a result of ramping up of the plans. Quarterly production of CC rods doubled to 62 Kt in this quarter, in line with the revival in the domestic demand. On Slide 23, we have given the sales volume of copper, VAP and DAP. Copper metal sales were up by 28% quarter-on-quarter at 75 Kt in Q2 FY '21 as the demand revised in this quarter. CC rods sales were more than doubled sequentially at 64 Kt in line with the market demand. The company achieved highest ever sales of imported fertilizer in this quarter at 127 Kt on the back of robust demand and excellent execution of deliveries. Financial performance of the Copper segment is given on Slide 24. Revenues were up 58% sequentially at INR 4,774 crores in this quarter on account of higher volumes and prices. As a result, EBITDA also bounced back to INR 208 crores compared to the last quarter. Let's turn to our consolidated financial numbers on Slide 26. Hindalco reported amongst its best-ever consolidated performance with a revenue of INR 31,237 crores, up 24%; business EBITDA of 4,672 crores, up 66%; PBT for continuing operations before exceptional and special items at INR 2,497 crores; and PAT for continuing operations before tax-affected exceptional special items at INR 1,775 crores in this quarter. The detailed quarterly comparative financial numbers are attached as an annexure to this presentation on Slide 30. The Hindalco India business also reported a remarkable performance in this quarter with revenues of INR 9,565 crores; business EBITDA of INR 1,275 crores and PAT of INR 327 crores in this quarter. These details are provided as an annexure to this presentation on Slide 31. Let me now hand over this call back to Satish to give you a perspective on our key focus areas.

So to conclude on Slide 26 with our key focus areas, which is accelerating our value accretive long-term growth and remain well positioned for the future in all respects and continue to deliver its best across all the business segments in line with the market. Our top and foremost priority are protecting our people, communities and the environment with all the required health and safety measures. Our strong focus on business continuity while maintaining stable operations and optimal utilization levels to meet the market demand as it revises and continues to penetrate and further strengthen our position. Secondly, by our relentless focus on stringent cash control as well as controlling the CapEx and aim to achieve targeted fixed cost reduction will help us to maintain positive cash flow for the operations. The cost competitiveness of Hindalco's metals continue to position in the first quartile of the global cost curve. 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 maintaining adequate liquidity and a strong balance sheet position in both India and Novelis with controlling the leverage. In the long term, all our strategic investments in Novelis and India downstream will provide a strong path towards creating a company with predictable and sustainable, generating positive cash flows. Lastly, our resilient, reliable and sustainable business model is further strengthened with the acquisition of Aleris. Our financial strength, together with our operational excellence and the integration of Aleris with the synergies will create sustainable long-term value for our stakeholders. Thank you very much for your attention, and the forum is now open for questions.

[Operator Instructions] The first question is from the line of Anuj Singla from Bank of America.

So first question, Mr. Pai, if you can reflect on what kind of cost savings we saw on the aluminum cost of production? And given the way the things are shaping up on the coal situation in India, how -- what is the outlook for maybe the 3Q and the second half of FY '21?

Yes. So first of all, on the cost of production, when we normalize it between Q1 and Q2, taking out the RPO benefits that we got, et cetera, it was flat. Q1 to Q2 was flat. Q3 is going to be flat to maybe 0.5% up at the most. And I think in Q4, you will probably see the cost of production go up by 1% or 2% because, as you said, the premiums that were 0 are now being raised to 10%, so we expect coal cost on the auction market to go up. And also furnace oil and coke oil related, we are starting to see cost inflation coming in. But I think Q3, because of our inventory positions, we should be flattish. Q4, you will start to see the cost going up, I would say, about 2%.

Understood. And sir, 1 follow-up question on Lewisport divestiture. While a lot of this was discussed yesterday call, there is some sort of investor queries on that. Probably, you can run us through the process on the bidding side. Is it -- was it DOJ, which ran the process on the bidding side? And secondly, if we had any kind of flexibility in probably going for a rebidding for the divestiture of this asset, given that the expected -- the value we realized was significantly lower than what we, as a company, were also anticipating?

Okay. So I think that maybe I will give this an answer, as Steve has probably gone through it yesterday itself. So the sequence of events, if I can remind everyone is that we lost the arbitration somewhere around the third week of March. And we were then told that we would have to divest Lewisport in April. And if you remember at that time, that was when the peak of the COVID hit. So we were working with the DOJ hoping that we would get some extra time, but the process started. There were interested people. But by the time we got towards July, August, because of the status of the market, most of the bidders have dropped off. So this is where, at that time, we started to work with the DOJ to see if we can get even more time beyond October, November. I think that for various reasons, my speculation is with the administration change happening as well. The DOJ wanted to close this off before the November and the new administration comes in. So unfortunately, the solution that has come -- the DOJ came up with was a sale to a private equity, which we don't think actually gives you any more competition in the U.S. because they -- I don't think that the experience to ramp up an auto plant with all the issues that are there. And I think that there could have been alternatives that could have done a better job. But long story short, I think that our hand was forced by the DOJ, and we think that we were not treated fairly, but they wanted to close it in November. I don't know if that helps, Anuj, but I just wanted to tell you that it's not that we had too much options. We've tried all the options possible to try to get more time or a better solution.

Understood. No, sir, that's very clear. And I think that will provide -- that clearly provides answer for the investor queries which I've been getting. So that's very helpful. Lastly, if I may, sir, we recently bid in the commercial coal auction as well. If you can just highlight the there and the time lines? And what kind of cost savings can come through?

So look, this time going into the commercial coal auction, we were very clear that we want to reduce the cost of coal for the overall portfolio. So we were -- we put in bids for 4 mines, and we were very serious about 3 and the 1 won. The one that we won was Chakla, which has got about a 4.5 million to 5 million tons of coal capacity. So our consumption is about 16%, and we want it at 14.5% revenue share. So this is going to substantially help to reduce our overall coal cost. It will take us 3 years to come up. So 4/7, which was bid yesterday, we were interested in, but you saw it went at 66% revenue share, so we were not interested at that price. So we have been disciplined, and we are happy with the coal mine that we got. And it can serve both the clusters, the Renukoot cluster as well as the Aditya Hirakud cluster, and it will help to reduce the overall coal cost for Hindalco going forward.

And this will primarily be used for captive purposes? Is that a fair assumption, sir?

Yes, yes, 90% for captive.

The next question is from the line of Pinakin Parekh from JPMorgan.

This is just a long-winded question. One of the things we have been trying to square off is that Hindalco operates the best-in-line business in upstream and downstream, but trades at a substantial valuation discount to its peers. One of the constant investor issues have been on the company's capital allocation, and the Aleris transaction, the divestments at a loss have not helped. Now when we look at this quarter, sir, if we add back the net profit plus depreciation is INR 3,500 crores of operating cash flow. And this number will only increase. We are looking at operating cash flows in excess of INR 16,000 crores, INR 17,000 crores. Going forward, sir, is there a mechanism to institutionalize shareholder returns as part of capital allocation going forward once it hits -- once the company hits a certain level of net debt-to-EBITDA? Would the company look at share buybacks as a tool to push the stock price higher? Because the company will generate a lot of cash flows going forward. And the complaint from investors is that higher cash flows means lower leverage, which increase the risk of capital allocation in organic or inorganic acquisition?

No. Fair question, Pinakin. So let me first tell you what our sort of medium term plan is. I think that you must have heard, with quite a lot of emphasis yesterday, both Steve and Dev emphasized, that as far as Novelis goes, as you quite rightfully said, if the economic conditions continue as they are now, we will be performing well, generating a lot of cash. I think we're going to be extremely disciplined with our CapEx. And our objective, that we have all agreed as a management team is that we are going to use this cash to reduce the debt of Novelis. We think that for our shareholders that should give a good -- equity shareholders a good boost because we will bring the debt levels of Novelis down. Of course, Novelis is also sticking to its commitments of taking the net debt-to-EBITDA below 3 within the 2 years. So I think that, to your point of different ways of rewarding the shareholder, we are going to try to reward the equity shareholders by bringing the overall debt levels down. So the cash generated will not be, if I can use the word used to go in for another inorganic acquisition or big organic in the short to medium term. We will want to put this back so that the equity shareholder benefits with the share price going up, Pinakin. So we are going to be extremely disciplined. And as I told you, in India, any CapEx to the downstream will be with the cash flows generated. We will not be borrowing more.

Sure, sir. But will the company be open to consider buybacks at a later date when the leverage targets have been hit?

Yes, I think that to be fair, we will look at all options, including share buyback, dividends, which will be -- all of them will be on the table, Pinakin. But my focus in the next 2 years is to use the cash flows of Novelis to repay the gross debt of Novelis, which is quite high, as you know. It's not just the net debt to EBITDA. I think the equity shareholders can be rewarded by paying down that debt.

Understood. Sir, my second question is when we look at the India Aluminum segment, INR 1,000 crores of EBITDA, the average cash aluminum price was $1,700 in the quarter. Now spot aluminum has gone to $1,900. Now Hindalco has a variety of hedges. So going forward, sir, how much of this quarter-on-quarter increase in LME aluminum prices we have seen should flow through to EBITDA?

So look, I guess that's another one of the standard question. So in the Q3 and Q4, we have roughly 59% hedged at $1,716, but also at a rupee of INR 76. So in Q2, the sort of hedging position was awash. So we've got slightly lower in the LME, but we gained in the rupee. So it was a wash. So now it depends on the position of the LME in Q3 and Q4. If it continues at the $1,900 level, at least on the LME side, you will see the upside only on 40% of the metal. But on the rupee side, you will be able to still see the gains because we are hedged at 76.45 in Q4.

The next question is from the line of Indrajit Agarwal from CLSA.

I have 2 questions. First, on Utkal expansion of 0.5 million ton. Can you help us understand what would be the benefits of that? So which facility are we looking to not further reduce utilization for once we commission the Utkal expansion?

Yes. So Renukoot refinery. So the Renukoot refinery is the one that we have probably the highest cost of production, around $270 per ton. And it is the one that has most of the problems with red mud storage, et cetera. So we will be closing capacity in Renukoot as soon as Utkal comes up.

Sure. That's helpful. In terms of hedging, have we started hedging anything for FY '22? Or is it too early?

No. We actually have started to hedge for FY '22, and we currently have about 20% at $1,812 and the rupee at INR 78.5. And at this current high levels, we are catching more now. Though the contango is quite small. I mean it's quite flattish right now.

Sure. That helps. On the coal mines. So mines, which we had won in the earlier phases, right, in Phase 1, Phase 2, do you have any production obligation, either annually or [indiscernible] or is it open-ended?

No, it has -- to be fair, it has some sort of an obligation. But you have -- because these were the first scheduled one mines, we have the maximum flexibility. And our game plan now is that like IV/5, which is an underground mine, it is technically not possible to produce by depillaring. So we will be looking to return IV/5.

Is there any penalty involved in that if you return a coal mine?

Not as per the contractual contract that we have got for those mines. No. You are allowed to return a mine with 1-year notice.

Sure. That's helpful. My last question is on RPO benefits. Is there anything on EBITDA in terms of RPO benefit this quarter? Or is this all below the line?

It's in the exceptional items. I think we have put it in the SEBI notes.

Yes, it's in the exceptional, but there is nothing in the EBITDA line?

No, no, no. The EBITDA now, the ongoing RPO rate is built into the EBITDA. But the extra that we got because of, I think, nearly INR 100 crores is in the exceptional income line.

The next question is from Vivek Ramakrishnan from DSP Mutual Fund.

My question was partly answered. I'm just going to slightly more detail, and this is the reverse of what the JPMorgan person asked. In terms of debt, there is a high level of debt in Novelis. It is 81 -- on a consolidated level, it's about INR 82,000 crores; and in Hindalco, it's about INR 24,000 crores. At Hindalco, we saw a buildup in inventory also. If that had not been there, probably, the debt would have actually come down this quarter. Could you give us a guidance on -- rather than net debt-to-EBITDA, because EBITDA keeps moving up and down with economic cycles, what is the level of debt that you'll bring the company down to in terms of -- so that you feel comfortable? And why was there an inventory increase in Hindalco? These are my 2 questions, sir.

So Praveen, you want to...

Yes, yes. So -- see, in the India business, there are 2 businesses, aluminum and copper. And particularly in copper, if the copper prices go up and the gold and silver prices go up, that's what inventory is made up of. Typically, the values will go up of inventory. So between, let's say, June end and September end, we have seen almost INR 1,000 crores because of the value going up, the price going up. This is typically funded by a very cheap credit, buyers' credit, which is less than 1%. So this is more because of the working capital debts. There are no long-term debts there. Long-term debts are more or less frozen.

Okay. Sir, on the absolute level of debt itself, is there a number that -- rather than a net debt-to-EBITDA kind of number because the EBITDA can be volatile and there were so many downside just to the economy. So is there a debt level that you will be targeting?

So look, the answer is in 2 parts. I think in Novelis, we will stick to our commitment to bring the net debt-to-EBITDA below 3 in 2 years, and that will include not just the EBITDA going up, but also debt going down. But the metric we will use is less than 3 in 2 years. On the India side, because that's an upstream business, I think the absolute debt level is important. So if you look at our -- if you say the gross debt is 24. If I take out the copper working capital...

It's INR 18,000 crores.

It's about INR 18,000 crores, right? I think that my target is to bring it down to about INR 12,000 crores.

The next question is from the line of Amit Murarka from Motilal Oswal.

Sir, just my question was on the production level. So the volumes, like, obviously, the share of domestic sales have improved significantly, but Y-o-Y volumes have been down. So was it because we were not anticipating such a strong bounce back in domestic volumes so that the production could be ramped up in time? Or what was the reason?

No. I think that -- look, the volume for the sale was at 303 Kt. And really, it's because 6.5 Kt did not -- the ship did not sail on time. So really, the sales this quarter would have been 310, 311, which that 6.7 Kt is passed on to Q3. Now the overall volume of production, if you remember, during COVID times, we had turned down the current and closed some of the ports. So we are slowly ramping that back up. The contract labor that is used to reline the ports if the situation is still tight because the COVID situation in the hinter lands is still coming under control. So we think that the production levels will start to rise in Q3 and Q4 as we get more and more ports coming online.

And then can we expect the full normalization of the production level?

So look, our normal production level should be at about [ 323 18 ] levels. And I think that we should get there hopefully by Q4. Q3 will be higher than Q2, you will see, as more ports come online.

Sure. Okay. And also on the domestic coal availability, now that the general level of economic activity is improving, so do you anticipate any kind of shortfall in linkage coal again, which has been an issue in the past?

See, I don't think there'll be a shortfall in coal, but I do think the e-auction prices will start to go up. But the -- what we have taken is that we have built quite a lot of inventory when we got during this COVID times a lot of cheap coal. So that's why my coal cost is not fundamentally going to change in Q3. It may go up very slightly depending on if we have to take e-auction coal.

The next question is from the line of Sumangal Nevatia from Kotak Securities.

First, just one small clarification. On the Duffel divestment, the EUR 100 million, which is outstanding, can you share the nature of the arbitration and your time line, when you're expecting that to recover?

So look, I think as Steve said yesterday, we signed the agreement with Liberty House somewhere in December, Jan. And it's a fairly airtight agreement for EUR 310 million. But Liberty House, of course, as soon as the COVID hit, tried to renegotiate. So what we have agreed is that we took EUR 210 million in cash, and the EUR 100 million will be arbitrated in the German courts. Now this arbitration process itself, Steve has already said, could last up to 2 years. But I think we will be trying to find a settlement for that as soon as possible.

Understood. And sir, with respect to the Lewisport, should we take, in terms of net debt reduction as $171 million or -- we can configure around that later on. So is it possible to clarify that?

Sorry, I didn't get the question. I'll ask Dev to clarify. But what exactly is the question?

So from a net debt perspective, what is the recovery or the reduction in net debt after Lewisport divestment? Is it $170 million? Or should we take the enterprise value $330 million, and we are transferring some debt in the deal is well.

No, no, the net proceeds are $170 million.

Yes. That is what will be the approximate debt reduction, just to clarify.

Understood. And 1 just last question. Sir, in terms of the [ pricing ] order in the terms of the [indiscernible] deleveraging, rewarding the shareholders, and the last one is a $1 billion CapEx, which you were thinking of spending in the India aluminum downstream. Where does this down -- Indian aluminum downstream CapEx fit in, in the overall setting order of these things?

See, the India aluminum one I have -- I think, mentioned many times. This is over 3 to 5 years. It is not a one-shot or a 1 year. So we intend, in India, to stay within the cash flows generated and invest in the downstream business to make us more independent of the LME. Okay?

The next question is from Amit Dixit from Edelweiss.

Congratulations for a good set of numbers. I have a couple of questions. The first one is on the impairment charge that you have taken in this particular quarter. So if you can clarify from which mine it is and whether there is a chance of reversing this impairment charge in the future? That is the first question. The second question is with respect to if there is any gain in offset hedge in copper?

Okay. So first, Amit, thank you for recognizing that it is a great quarter. So I think that's a good one. And then the impairment we took was on Gare Palma IV/5. And if you just heard my comments, most probably we will try to see if we can return this mine, because technically it's not possible to produce 1 million tons by depillaring. So that's why we impaired the assets of Gare Palma IV/5. And then Praveen in offset...

In offset hedge, there is no real profit or loss. Sometimes we have accounting noises between quarters. This quarter, we don't have much of an accounting noise.

So this INR 288 crores is pure cash EBITDA, essentially. Nothing -- no accounting noise here?