Hindalco Industries Limited (500440) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Hindalco Industries Second Quarter FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Subir Sen, Head of Investor Relations at Hindalco. Thank you, and over to you, sir.

Thank you, and a very good evening and morning, everyone. On behalf of Hindalco Industries, I welcome you all to the earnings call for the second quarter of the financial year '22. In this call, we will refer to the Q2 FY '22 investor presentation available on the company's website. Some of the information on this call may be forward-looking in nature and is covered by the safe harbor language on Slide #2 of the set presentation. In this presentation, we have covered the key highlights of all our businesses for the second quarter of this financial year '22 and a segment-wise comparative financial analysis of India business and our overseas subsidiary, Novelis. As stated, during our last quarter's discussion, the unallocable corporate AS&D expenses, which used to be a portion to individual business segments is now clubbed under unallocable expense or income in order to truly reflect individual business segment EBITDA in the Indian operations. The corresponding segment information of the prior periods have also been restated accordingly for a comparative analysis. We have with us from the Hindalco management, Mr. Satish Pai, Managing Director; and Mr. Praveen Maheshwari, Chief Financial Officer. From Novelis management, we have Mr. Steve Fisher, President and CEO and Mr. Dev Ahuja, Chief Financial Officer. Following this presentation, this call will be open to any questions you may have. An audio replay of this call will also be available on our website. Now let me turn the call to Satish.

Thank you, Subir. Good afternoon, good morning, everyone. Thank you for joining today's conference call of Hindalco's earnings for the second quarter of FY '22. Let me now start with our progress for the first half of FY '22 across various sustainability metrics on Slide 5 and 6. On the environment, we continue to focus on water-based air emissions and biodiversity. We have achieved 84% recycling and reuse of waste in the first half of FY '22. We have achieved 90% bauxite residue utilization at 3 of our 4 alumina refineries in the first half. At Utkal Alumina Refinery, we are currently running several research projects to reuse the bauxite residue for mine backfilling and road construction. We are committed to 100% waste recycling in terms of all sites. On water, our freshwater consumption in H1 was 36.4 million cubic meters with a continuous reduction in consumption of water at all locations over the years. Hindalco has successfully achieved 0 liquid discharge at 11 of its 15 sites and is adding 1 site each year to achieve 0 water discharge by the end of the year 2025. On green cover and biodiversity, in line with the IUCN guidelines, we have implemented biodiversity management plans at 2 of our plants and 2 mines, and we have now started implementation of 4 more other mine sites. The cumulative green belt at all our sites at the end of the first half of FY '22 is now spread over 4,909 acres. Coming to renewable energy and safety updates on Slide 6. Our assessment shows that the total potential of our on-site solar projects across all units is around 246 megawatts. So we are committed to reach this year's target of 100 MW being commissioned as we speak, by the end of March 2022. Over the next few years, we have so far identified or are in the process of finalizing an additional 96 megawatts of solar projects. We are targeting to reach 200 megawatts of solar by the end of '25. We are currently exploring and evaluating emerging technologies in the space of energy storage, carbon capture and utilization and hydrogen to be used as fuel. The specific energy consumption in aluminum was recorded at 82.7% at the end of first half of FY '22 from the base year of FY '12. On safety, we are committed to Zero Harm and have been continuously upgrading our safety programs and systems to meet international standards to provide a safe environment for each of our employees and contract workers. The LTIFR was recorded at 0.3 in the first half of FY '22. Unfortunately, we had 1 fatality recorded of a contract workmen at our Indian operations in the first half of this year. Coming to Slide 8. Hindalco continues to deliver its best ever business and financial performance across all businesses backed by improved macro, better operational efficiencies, higher volumes, and a strong market recovery. Novelis recorded quarterly shipments of 968 Kt, up 5% year-on-year and an EBITDA of $553 million, up 22% year-on-year on the back of higher volumes and favorable metal benefits. EBITDA per ton stood at an all-time high of $571 per ton, up 16% year-on-year in Q2 FY '22. Net income from continuing operations was at $239 million in this quarter, versus $144 million in the corresponding period of last year. Novelis successfully refinanced $1.5 billion unsecured senior notes with an annualized interest savings of $35 million in this quarter. Novelis continues to invest in the strategic organic expansion projects. In line with this, we recently announced $130 million investment to enhance hot-mill capacity by 124 kt and improved finishing capabilities for automotive sheets at Oswego, U.S. Moving on to the Hindalco's India aluminum business performance in Q2, our quarterly EBITDA for India aluminum was at a record high of INR 3,247 crores, up 173% year-on-year. EBITDA margin was more than a decade high of 42% and continues to be one of the best in the industry. Aluminum metal sales was up 12% year-on-year at 338 Kt versus 303 Kt in the corresponding period, in line with market recovery. Value-added product sales were at 86 Kt, up 36% on a year-on-year basis. I'm happy to share with you that our 500 Kt Utkal Alumina expansion project has started its commercial production and has already achieved its rated capacity during this quarter. This will take our total capacity of alumina as Utkal to nearly 2.1 million tons per annum. Turning to the quarterly performance of the copper business on Slide 9. Both our smelters ran optimally during this monsoon quarter. Our capital production was at 100 kt, up 38% year-on-year, while the CC rod production was maintained at 65 Kt in this quarter. Metal sales were at a record high of 110 kt, up 47%, while CC rod sales were at 70 Kt, up 10% year-on-year. Copper EBITDA was recorded at INR 352 crores this year, up 45% year-on-year on the back of higher volumes, better operational efficiencies and improved by-product realization. You must have read by now that Hindalco has signed a definitive agreement with Polycab to acquire 100% equity stake in Ryker Base Pvt. Ltd. to increase the portfolio of our copper value-added products with the purchase consideration of INR 323 crores which is subject to customary working capital/net debt closing adjustments. This is a ready facility with a capacity of 225 kt manufacturing cost and roll copper wire rod. With this acquisition, our value-added CCR capacity shall reach 570 Kt per annum. Coming to our quarterly consolidated performance. EBITDA was at a record INR 8,048 crores, up 56% year-on-year. Quarterly consolidated PAT for continued operations stood at INR 3,427 crores, up 92% year-on-year compared to INR 1,785 crores in the corresponding period last year. Hindalco continues to maintain a strong treasury balance of around $659 million in Novelis and INR 13,748 crores (sic) [ INR 13,737 crores ] in India at the end of September 2021. Net debt-to-EBITDA was below 2 at the end of September 2021 at 1.93x versus 2.59x at the end of March '21. Turning to the broader economic environment on Slide 11. As per IMF's latest estimate, the global economy is expected to expand to 5.9% in calendar year '21 after contracting 3.1% in calendar year '20. Global economic recovery is gaining pace. However, pandemic outbreaks climate-related disruptions in certain regions have led the supply shortages amidst a rising pent-up demand, which is ultimately feeding into higher inflationary surges. This presents complex policy trade-off, especially for policymakers who are cautiously normalizing the monetary policy. Policy induced slowdown in China as well as slow pace of vaccination in underdeveloped countries poses downside risk to global growth. However, price pressures are expected to subside as supply chain shortages wane, signs of which are already visible. Global economic recovery will continue to be supported by vaccine administration and monetary policy actions. On the domestic front, India, after being hit by 2 COVID waves, is gaining pace in its economic recovery. High-frequency economic data has shown strong sequential recovery, indicating an uptick in both aggregate demand and supply. Mobility indicators have recovered quickly, almost reaching their pre-COVID levels. Going forward, continued vaccine momentum along with effective monetary and fiscal support will determine the strength of economic recovery. The IMF and RBI have maintained their GDP growth forecasts for India at 9.5% for FY '22. Weakness in global growth momentum, rising inflation and global supply chain disruptions could be key downside risks to this growth. Let me now take you through the aluminum industry overview on Slide 12 and 13. Year-to-date calendar year '21, global production grew by 5% to 50.6 million tons, led by a 7% increase in Chinese production and a 3% growth in red to the world. During this period, global consumption redounded sharply by 12% to 51.5 million tons due to the low base effect. Chinese consumption grew by 8%, while rest of the world grew by 17%. As a result, the global market was in a deficit of 0.9 million tons with a Chinese deficit at 1.1 million tons, partially offset by a small surplus of 0.2 million tons in the rest of the world in the first 9 months of calendar year '21. In Q3 calendar year '21, the overall world production expanded by 4% year-on-year to around 17 million tons, while consumption registered a growth of 5% year-on-year to reach 17.2 million tons, leading to a market deficit of 0.2 million tons. In China, consumption grew by 1% to 10.3 million tons due to significant headwinds from softer demand for internal combustion vehicles in the auto sector, which was on a continued decline since May 2021 due to the shortage of semiconductors and also subdued building and construction demand. However, the Chinese government encouragement for EV and renewables, especially solar, is likely to support aluminum consumption. As the global markets remain in deficit, with the improvement in global consumption, aluminum prices continue to grow by 10% to $2,647 per ton in Q3 calendar year '21 from an average of $2,400 per ton in Q2 of calendar year '21. Additional tailwinds that support strong aluminum prices include accommodative monetary and fiscal policies, production curtailment on Chinese supply, leading to global deficits and low global inventory. Coming to Slide 13. Domestic demand is likely to be at around 943 kt, 26% growth year-on-year this quarter due to the low base effect. However, if we compare sequentially, the consumption has grown by 4%. This is attributable to broad-based sustained recovery across almost all sectors. However, the automotive demand softened due to semiconductor shortage, which also led to a 1% de-growth in scrap imports. Sequentially, the sale of domestic primary producers increased by 16% to 396 Kt in this quarter. Going forward, with the record vaccination and supportive policies, economic sentiments are likely to improve. This will help in a broad-based recovery across all sectors. The growth in e-commerce and onset of the festival season will continue to improve the consumption of consumer durables. Hence if there is no third wave in India, Q3 FY '22 aluminum consumption is likely to be higher than Q2 FY '22 consumption. Moving to Slide 14. The global FRP demand is expected to grow by 9% in calendar year '21 versus a contraction of around 4% in calendar year '20 on account of recovery in demand and the base effect. The market demand for beverage can sheet continues to be strong, and we estimated to grow by around 3% to 6% calendar year '21. The automotive segment is estimated to grow between 20% to 25% in calendar year '21 due to the base effects and continued revival of demand. The semiconductor shortage uncertainty continues to impact OEM production and auto sheet demand. The demand in specialties is expected to grow in the range of 5% to 10% in calendar year '21 with favorable housing fundamentals in the U.S. and Europe, driving the strong B&C demand. In Q2 FY '22, the domestic FRP demand is expected to grow by 34% year-on-year due to the base effect. Demand remains strong in packaging and consumer durables. P&C demand improved due to government projects. However, the auto sector faces some headwinds. Coming to the global copper industry on Slide 15. For the first 9 months of calendar year '21, the global production increased by 5.7% year-on-year, while consumption increased by 6.9% year-on-year. Year-to-date calendar year '21, production in China increased by 9% and consumption by 5%, while the rest of the world production increased by 4% and consumption by 9% year-on-year. In Q3 of calendar year '21, global production increased by 6.4% and consumption increased by 4.3% year-on-year. During this period, production in China increased by 7%, while consumption was flat due to lower physical demand on account of price volatility, spread of the delta variance and fear because of the other branded debt reform. On copper concentrate due to subdued demand from the Chinese smelters, the fourth quarterly TC/RC in Q3 calendar year '21, weakness had increased over the previous quarter to $0.146 per pound against $0.09 to $0.10 per pound in Q2. The spot TC/RC has now surpassed the calendar year '21 benchmark of $0.154 per pound as labor negotiations in some large South American copper mines were concluded without any major disruption. The benchmark negotiations for calendar year '22 is likely to be completed during the current quarter and is expected to be better than last year's benchmark TC/RC. Coming to Slide 16. On the domestic side in Q2 FY '22, the overall copper market grew 36% sequentially at 160 kt versus 118 Kt in the corresponding period of last year. On a yearly basis, domestic demand grew by 7% year-on-year at 160 Kt in Q2 FY '22 from 150 Kt in the corresponding period on account of recovery in demand. The current demand is expected to marginally drop in the month of November due to the festive season. In segments like B&C, railways, transformer, consumer durables, et cetera, demand is expected to witness growth while the automotive sector shall remain constrained due to the shortage in semiconductor. Now the trend of the operational and financial performance for each of the business segments for this quarter, and that is the corresponding period of last year are covered in the further slides and annexures to this presentation. But I'm going to conclude by moving on to the 3 focus areas on Slide 31. Our focus on cost optimization and integration has helped the company to position itself in the first quartile of the global cost curve. Our primary focus remains stakeholder value enhancement. Hindalco continues to focus on profitable growth through its investments in recycling debottlenecking and organic expansion in stable and predictable downstream businesses in India and Novelis. The recent announcement of the Oswego mill expansion via debottlenecking and the Ryker acquisition in copper are some steps towards it. Hindalco's product mix diversification continues to help in enriching its product portfolio by increasing the share of high-end value-added products in the overall product mix to strengthen its position as the world's largest aluminum downstream company. We also continue to focus on the ESG front with the emphasis on the commitments we have made for 2050, while creating a sustainable green stronger and smarter world, and we strive to be called the most sustainable aluminum company in the world. Lastly and most importantly, Hindalco is focused on strengthening its capital structure with a strong balance sheet by accelerating the pace of deleveraging through robust cash generation, in line with this capital allocation framework. Hindalco's consolidated leverage to date is below 2 at 1.93x at the end of first half of FY '20. Thank you very much for your attention, and the forum is now open to any questions you have.

[Operator Instructions] The first question is from the line of Indrajit from CLSA.

Two questions from my side. First, can you help us understand how much was the alumina sales this quarter, if there was any? And how does it look vis-a-vis 1Q?

So we had a 30 kt sale of alumina from Utkal this quarter.

And would have been negligible last quarter?

5 Kt last quarter. I think the pace of third-party sales is now going to pick up in Q3 and Q4 because we are now fully ramped up.

Okay. I just want to actually understand the realization improvement, given the hedges in aluminum, it looks much sharper than probably what we have been expecting. So any color on that, any one-off or anything that we could factor in going forward? And what is the hedge policy?

Good point. So I think let me give you -- if you remember, last quarter, I had said that our cost of production would go up by 5%. And it went up exactly, I think it was about 5.1%. So in this quarter, in spite of all this coal shortages and other things, we managed to keep our cost of production under control. And I think the second thing is the operations were very steady. Logistics costs were under control because we managed to move a lot more by rail rather than road. So I think that's why, overall, we had a pretty good fall-through on a good macro LME environment. Now coming to your point on the onetime, yes, we had one onetime, which was about INR 130 crores of RoDTEP. If you remember, the RoDTEP finally got announced. So this quarter, we took INR 130 crore of RoDTEP. And I also want to remind you, last quarter I had told you that we missed 10 kt of sales from Q1 because of the late movement of the ships. So if you look at the sales of 338 kt, 10 Kt was that the ship sailing on July 1, which got recorded in this quarter. So that extra 10 Kt of sales is also there in the results.

And what is the rupee guidance for third quarter? What kind of features.

So yes. So third quarter, I think now we have done a fairly detailed analysis, and it's going to go up by 8%. So we are seeing a little bit more inflation there. But on the other hand, we also would like to say that we are starting to see some of these tightness starting to flatten out. So if you have looked at international coal prices, even freights, these are now starting to ease off. So probably Q3 may be a little bit of the peak, but we are starting to see these ease off now.

Sure. That's helpful. My second question is on the Ryker acquisition. So as you mentioned, with this, we'll have 570 Kt of downstream. Our current run rate of cathode is about 380 to 400 Kt. So will we be importing cathodes to cater to that? And what kind of margins you can generate from this business?

So look, I think that besides our own cathode production, we always have what we call blister scrap. And you're right, we also import cathodes from Japan to convert into copper rod.

Also, we have signed up an agreement with [ Bodica ] to grow their requirements as well. So some part of this could be just tolling as well.

Any guidance on what kind of margin or EBITDA we should look for in this business?

So we are not giving any guidance on EBITDA or margin for this particular activity separately, but it's a strategic investment. And it will be value accretive for us going forward. You have to look at the business as an overall business itself, and this helps us in consolidating our position even more strongly in the domestic market.

But broadly speaking, it will be above that 15% ROC [ ardent ] rates?

Yes, yes, absolutely.

Yes, Absolutely.

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

I have 1 question. It's not related to earnings. But broadly, as management looks at the aluminum environment at this point of time, very strong upstream, very strong downstream and in a large part driven by what China has done in terms of decarbonization. Now with China were to continue walking down this path and logically from here stop aluminum exports and aggressively start importing aluminum scrap, they are setting up a huge recycling capacities, would the downstream business at Novelis be as resilient in that elevated scrap price environment if we were to see China do that over the next 1 to 3 years?

So I'll let Steve talk, but I'll give you 1 perspective. China is doing what I'm telling the Indian government should do more in the sense that China actually has put restrictions on the type of scrap that can come to China and is very aggressively promoting domestic scrap because now China is a large aluminum market. And they are pushing for more collection and usage of domestic scrap to be collected and used in China. So you're worried that U.S. or European scrap will largely go to China. China and actually even Malaysia have all started to push for more domestic and stop import of scrap coming in. But Steve, do you want to have anything more to add?

No, Satish, I think around the world, we think you see more circularity in recycling and team flows of recycled content moving from one continent to another continent just not going to occur. And so as scrap increases the recycling rates in the back for automobiles and everything else in the other places, we feel very comfortable that we'll get access to that scrap at reasonable prices.

Sure, sir, just to push this point further. I mean the worry -- one of the worries is that between inter-production and importing scrap if China's priority is decarbonization, that it may look to relax the quality curve and aluminum scrap it has put in over the last few years. If that were to happen, would you be as confident on scrap pricing and availability? Or is it dependent on China continuing to keep restrictions on aluminum scrap imports?

So look, I think, Pinakin, this it's fairly hypothetical to sort of look at that. We can only look at the actions of the Chinese government right now. Right now, they're going through a shortage they are importing, but they're not really started to completely open the scrap market, et cetera. So I do not personally believe I think that Steve's point is that every country will be pushing to meet its obligations and will push for circular economy. China for the last 10 years has been consuming half the world's aluminum. And I think that I expect them to really push for their own scrap to be now collected and reused.

Sure, sir. Lastly, sir, should India aluminum cost of product should peak out in the December quarter, given that coal prices, the tightness is easing out? Or do you see cost of production to continue to move higher given where general inflation trends are into the fourth quarter as well?

I personally -- that's why I think towards the first person's question, I tried to say that I am sort of seeing many of these peaks of CP coke [ stage ], international coal, furnace oil, they all sort of have spiked up dramatically. They have all started to ease out now. So I personally believe that it is probably going to smoothen out. I don't think it's going to go up dramatically from this point.

The next question is from the line of Amit Dixit from Edelweiss.

First of all, conversation for a very good set of numbers. I have 2 questions. The first one is on cash flow. So if I see from stand-alone operations, very negative cash flow in H1 despite a very robust EBITDA generation and largely it is due to working capital, particularly savings are down significantly. So how do you see it going ahead? I mean do we expect this working capital to start unwinding from Q3? Or do we have to a couple of more quarters?

No. I think these -- the first half has seen a major increase in the LME for India operations, copper LME becomes even more relevant because that's where we are buying and selling in copper. So really speaking, that is what has taken up the large part of the working capital blockage in the first half. Today, the copper prices are more or less stabilized between $9,500 to $10,000. Unless it moves up further from here, which we don't see, we are not likely to see any more blockage of funds in the working capital. So really speaking, we are not feeling bad about it because it's -- working capital is something which is very transitory. Today, it's got blocked, but tomorrow when the LME comes down, it will come out again. You'll see a cash inflow coming in at that point of time. So to answer your question, no, we are not seeing any further blockage from here onwards. And same is the situation with Novelis. So Novelis also unless aluminum actually moves up, we don't see any further cash blockage there.

Okay. The second question is essentially on coal and met coal. So last quarter, of course, we saw, call it, on the kind of [ shillings ] and you have seen it this quarter also. So if you can let us know your coal sourcing mix last quarter and how is it likely to change in Q3?

So the coal mix between linkage and e-auction was 96%, and our own mines was 4%. But I think this average for the quarter hides the fact that in the last month of the quarter when the whole coal shortage and the diversion of coal to IPP started, we actually ramped up our own mines quite a lot, which always is actually producer. Now the interesting thing for you could be that in Q2 to Q1, our coal prices on a per million kilocal was flat, which I think it's quite a remarkable achievement. And this was largely because we were carrying heavy inventories going in. So I think in Q3, if you look at my guidance that 8% cost is going to go up. That's largely because now we have taken in more e-auction coal and that coal price inflation is what we have built into that 8% for Q3. So as a mix, I think it is not going to change much. It's still going to be largely linkage [ interruption ].

Just a brief follow up on this, but we are not seeing any shortage of coal anymore?

No. I mean, let's put it this way. We were, in some places, tight, but we started the quarter with over 30 days inventory in coal. And I think if you go and look at our working capital block at Q1, it looked a bit high because we were carrying a lot of inventory of typical pitch coal. And we do that as a routine before every monsoon quarter, every year. So we did not have any -- we were not down to this 1 day, 2 day actually. We were much better than that.

The next question is from the line of Satyadeep Jain from AMBIT Capital.

A couple of questions on sustainability. One is on the carbon capture and first of all, what you've done in bauxite residue is commended and encouraging to hear thoughts on carbon capture and hydrogen. Firstly, on carbon capture, what kind of technology are you exploring for carbon capture? And then you look at different base utilize it. Have you explored that you want to convert into urea? And have you done some kind of analysis on IRR on some of these projects?

Look, we are not in the IRR. We are in the pilot stage, and we are actually working with Shell and Technip. And they have got a certain technology, and we're going to do a pilot in Aditya to try out how it works. So I think that's about it I can tell you at this time. I just wanted to expand. We have taken a net carbon zero at 2050. So we are built a model. So our model means that we are experimenting with quite a lot of technologies, where we are trying to look at hydrogen as well. We are starting to look at buying renewable power from the large power suppliers in India because they have started to offer renewable power at about 80%, 85% load factor. So there's a number of things that we are trying and we are experimenting to get down that carbon chain.

Okay. So on that follow-up to that experimenting new technologies, 2 large global players are now talking actively about inert anode technologies. And one of them is actually saying they might start licensing it in a few years. Would -- I know it's still too early, but has the management explored the possibility of retrofitting the current smelters with some of these technologies that will mean licensing these technologies from others? Why I'm asking this is maybe in a couple of years, other companies may start adopting it. And then given the intense smelters have highest CO2 emission, the pressure might be there on the Indian smelters to also start licensing even though we have net zero carbon ambitions day down the road? And then related to that would be, would the company maybe try to optically seems based on what we are hearing from other global players that they are ahead of on the technology part. Would Hindalco also look at increasing R&D on some of these new fast-breaking technologies so that in the future, we can -- we don't have to license it from others, and we can -- Hindalco can adopt its own technology.

So first on the last point, we have patented a copper inserted collector bar, technology that is now being bought by some of our international competitors from us. So we have already started to ramp up our R&D and projects for smelter technology. Now on these inert anodes, you have to realize that this is a project that's been going on for the last 20 years, this Elysis technology that you are talking, Alcoa and Rio Tinto have been doing. So we have been monitoring it. I wanted to tell you that there are other such technologies on inert anodes that are going around. We are also experimenting with some of them. So in the broader scheme of things, when you look at the carbon per ton emitted on a production of aluminum, the power is 90% of that carbon. The smelting process is important, but from a pure carbon point of view is not that high. So just to tell you, our focus point is still on the energy source in India because that's where we can get the maximum bang for the buck to remove the carbon. But to your point, are we looking at these technologies? Yes. Are we experimenting? Are we increasing the R&D? The answer to all of that is yes.

The next question is from the line of Pallav Agarwal from Antique.

Sir, I have a question. You mentioned in your opening remarks that LME prices have been supported by abundant liquidity. So do you think the [ tapering ] by the federal reserves with current inflation concerns, that could start having a dampening effect on the LME prices?

So I think the market always responds far ahead of the event. So the Fed has been talking about pulling back the liquidity measures and tapering for a while now. And if you actually look at the aluminum prices today, they are running at $2,650 compared to where we all a couple of months or 1.5 months or 2 months ago at about $3,000. So I think the monetary policy part is already baked in. But what is coming back is the basics of supply and demand. The basics of supply and demand is that even with whatever you say, we still have a deficit today after 9 months of the calendar year at 0.9 million tons and people are predicting it to go up. So I think that between the tailwinds and the headwinds for aluminum, we take that fundamentals are still pushing towards a much more formal LME. At least don't ask me to predict it.

Sure, sir. So because in the past, sometimes, we've seen that when interest rates go up, the carry trade between the forward and the spot that some unwinding can take place. So that was just one of...

No, that has already taken place. If you look at the aluminum or even the copper, aluminum is a very small contango for 3 months from $15 or $18 and then it's a backwardation. So that carry trade is not driving aluminum prices right now.

Sure, sir. Also any changes in our hedge position from last time?

No. As we said right now, we are just watching because it's a big backwardation. For next year, it's $150 to $170 backwardation right now.

Sure, sir. And so what do you think is causing this backwardation? Is it that the short-term supply squeeze, pushing up spot prices?

Yes. I think so because you see the aluminum prices shot up to $3,000 very fast. And that's why the big backwardation, at that time, the backwardation was even more. Now the backwardation is slowly coming off. And if you see now, LME seems to be trading between $2,600 and $2,700 right now. So I think the market is waiting to see whether this range holds or whether it starts to go higher.

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

First question is with respect to the copper division. So margins have recovered very strongly at INR 350 crore run rate. So -- and also the commentary on TC/RC is expected to be better in the coming calendar year. Do we expect this run rate to be the new normal given that production volumes have also now stabilized?

Sumangal, the only thing I'm really happy about copper is that the operations have stabilized. The production is running steadily. So I think that I'm hoping that it will continue. I mean, the copper results, if you listen to the remarks, the value-added sulfuric acid prices have been very strong. So that has really helped the EBITDA on the copper side.

Understood. And do we expect now the CC rod utilization at least to start with reach 100-odd-percent levels of our cathode volumes?

Yes. No, of the cathode volumes -- you see our cathode volumes is around 370, 380 and now our CC rod capacity will be 570. So we do have some commitments to sell cathode, that's why we may still do that. But the demand of copper in India is still at 80% of the pre-COVID levels. And I think that 1 large part of that is because the copper prices ran up so much that today, many of the MSMEs and SMEs can't -- the working capital block of bringing this copper has become a big burden on them. Otherwise, I would have expected the copper to come back. So the large players can handle it. And of course, the severe backwardation in copper also is a problem for them because they buy the copper and a couple of months the end products will go out and they like to price N plus 1 and N plus 2. So it's in a backwardation, it's a big issue for them.

Understand. Understand. Mr. Pai, my next question is to you on the Novelis business, broadly on the strategy point of view. Now if you see the can segment, we have a very strong outlook. And whatever debottlenecking, they are doing appears to be at best replacing a hot mill capacity for the new auto lines. So maybe 2 years, 3 years down the line, we might be start losing market share if this strong demand continues. So at what stage do we start considering a greenfield hot mill? What could be the ticket size? And what is the ask from customers before we commit a bit capital into big greenfield hot mill capacity?

So I don't think we'll wait for 2 to 3 years to make with Steve, the discussions have already started. So I think I'll let Steve talk about what he's listening from the can customers. But all I wanted to tell you is that we are very conscious that as a market leader Novelis will lead the push to add new capacity. So Steve, do you want to just talk about the can market?

The [ spoty ] aluminum markets are strong all across the world, but they are driven a lot by the large base in these beverage or beverage demand. And so we see this opportunity. We're in dialogue with our customers. And see probably most predominantly in the North America and Europe regions. And as far as discussions and contract sizes, those are all things that we're working through right now with the strong demand and continue to evaluate the opportunity as far as whether it's consumer debottlenecking and brownfield expansions or greenfield, those are still discussions that will happen. So it's probably too preliminary to discuss size of investments, but we certainly understand the opportunity, and as Satish said, the market leader here, really accretion leading the industry in having additional capacity here.

Understood. But just in terms of ticket size, I mean when you just do finishing line, it's a couple of hundred million dollars. But for a hot mill greenfield [ dock in ], could it run into a $1 billion plus kind of ticket size?

I think why don't you wait for us to announce a deal. I think there's no point in us speculating. But you're right to say that it is going to be a certain number of x times just optimization project or equipment.

[Operator Instructions] The next question is from the line of Abhijit Mitra from ICICI Securities.

Congrats on a great set of numbers. My question is more on the metal sales in the Indian operations. So we are looking at around 330, 340 Kt run rate. How do you see this number changing over the next couple of years? And also if you can give a brief update on the expansion plans out there? Any new additions? Any thoughts that you'd like to share?

Look, the run rate is not 338. As I said, 10 kt was a spillover. So normally, it's around 320 to 325 per quarter is what we normally sell. And I think that the bigger project for us is that we are now at about 36% of it is value added. And we have announced the Silvassa extrusion plant, the FRP expansion and we are steadily trying to improve the value-added percentage from 36% upwards. So that's really our strategy. So from a pure metal total upstream, downstream total sales, that number is not going to move up too much in the next 2 years because we are not adding any new smelter capacity. Now that being said, we do have one line that we had closed in Renukoot. We are restarting that line in November. So we will get about 20, 30 Kt more of metal come in annually, not third quarter yet.

Right. And the other question which I had was that given the spot prices of input and assuming that I am buying alumina, what kind of margins is current metal prices given to a smelter as per you?

Sorry, metal price, I didn't get the question. Alumina is spiking up so?

No, I'm saying that given spot prices of the imports and assuming that I'm buying alumina of the market, what kind of spread would a completely unintegrated smelter in India make today with the power cost that he is facing, given the current aluminum?

Well, I think that you probably need to look at one of our competitors and make that assessment.

Yes, but it will be very thin. It is running quite thin. Is what -- this kind of thing?

Yes, it depends. I mean today, the spot prices are alumina are 450, but we have to realize that people normally will look at it over a quarter, a few months. So if it persists at 450, then yes. Somebody does not has alumina is going to get badly impacted.

The next question is from the line of Raashi Chopra from Citigroup Global Markets.

On the alumina side, you mentioned that the pace of sales will be higher. So just trying to get a hold of how much will Utkal replace internally? And how much should we kind of factor in incremental net sales going forward?

So currently, our plans are for the second half of the year, we'll probably sell about 150 Kt of alumina in the third-party market.

And can I assume that run rate for next year or you need to take a decision on that?

No. I mean the run rate for next year, you could say it's going to be in that range than 150 to 200.

Okay. Just on just on your coal breakup, what was the breakup in the quarter, coal sourcing breakup?

Total linkage 52, e-auction 34, own mines 4.

And this year sir, how was that change into the third quarter?

It wouldn't change much.

And the coal cost was flattish on a quarter-on-quarter basis?

I said Q2 to Q1 was flat, and I said Q3 coal prices will go up because I've already said our cost of production will be 8% higher than Q2.

Right. And then is 8% is the bulk of it would be coal and the margin?

Coal is 40% of our cost. So there are others that have also gone up. So it's mixture. So I would rather leave it at that to give you an overall 8%.

And just one last question. Have you -- are e-auction prices sustainable at elevated levels in the coal situation ensuing?

No. I think now, as I said, the production has also started to go up. So I think that the auction prices are going to taper down now.

The next question is from the line of Bhavin Chheda from Enam Holdings.

Sir, I missed out if you had given the hedging position at the end of quarter?

Well, one of your colleagues asked me, has anything changed, I said no. So we are -- if you just want it, we are at about 30% hedged at $1,900 for the second half of the year. So no change.

It was 30% for second half. And actually, sir, you were hedged for 23% also you were beyond that.

No, the 23% is for next year at $2,230.

$2,230 for next year, 23%. And 30% for second half at $1,900.

Exactly the same as what it was at the end of last quarter. Nothing -- no the rupee was second half, 19% hedged at 78.6. And for next year, 10% hedged at 83. So this is exactly what it was, no change.

Okay. And on the copper now, this run rate is sustainable of production volumes and even CC rod, there was a good pickup in volumes, sir.

The CC rod actually should pick up. We are producing only 70 Kt per quarter. We can do a lot more now. As I said, that some part of it, the market demand needs to pick up. So copper CC rod sales should go up next quarter.

The last one, what kind of deleveraging we are looking at second half and say, next 12 to 18 months?

Free cash flow should be good in the second half. It's a question of whether we want to prepay certain debts at this point of time or not. We are in the process of evaluating the next 5-years plan and putting in the numbers in place. We do have a INR 6,000 crore debenture, which is due from April to August '22. So that will definitely go off our balance sheet next year. Earlier, our plan was to refinance only INR 4,000 crores out of this and pay down INR 2,000 crores out of our internal cash, but we are relooking at that and we are seeing that totally we may not need to refinance even INR 4,000 crores. So we'll come back with a more clear position. We will hold another Investor Day sometime in February, March, again this year. And that's when we'll come back to the comprehensive plan going forward for both Novelis and India.

The next question is from the line of Samuel Chen from Alliance Bernstein.

Just one very quick question. I've heard that you mentioned that you guys are starting a new line on you understand it's a very small line. Just 2 questions. How long will it take to do it if you start in November? And on average, what's the cost could be like versus your current operation?

So in Renukoot, we have about 13 lines, so it's 1 line. So it should take us about 1.5 months to ramp up. And the cost of production will be what it is right now. It's not going to be up.

Okay. So what was the reason for the shutdown before? Was it just maintenance?

No, I think we took that decision to shut it down at that time because it was actually we had some the rectifier issues that the power consumption was too high. So when we shut it down, we have fixed all those issues. And now we were also wanting to start it earlier this year. But then when we saw the coal situation gets tight, we postponed that decision to November. Otherwise, that line should have come back on stream around July, August.

The next question is from the line of Vishal Chandak from DAM Capital.

Sir, given the strong cash flows that you have across the board, both in the Indian business as well as Novelis and also Utkal would also be a little bit of cash flow. How do you now look at your capital deployment? Would you want to revisit them between CapEx long term, short term and distributing more because you already have kind of reached more than desired optimal leverage levels but the cash flows keep on coming up stronger than what anyone would have anticipated probably a year ago? Are you capital light?

So really speaking, as I said earlier, we'll be coming back to you around February, March, again this year. It will be exactly 1 year from the last time that we actually announced the capital allocation framework. I don't think we can get it on a quarterly basis. So we would -- every year, probably will come back to you on the time. That's the time also we have our planning and exercise also completed. So we'll come back to you and we'll announce and revisit if required and come back to you with clarity as to how we look at it going forward.

Sure. Sir, my next question was with respect to your downstream projects in India. If you could just give us an update on where we are with respect to aluminum downstream expansion as well?

So the Silvassa project, after we've got all the clearances so the civil work has started, all the extrusion pressures have all been ordered. So that project is moving around quite well. The big FRP expansion project we announced in Sambalpur between Hirakud and Aditya. We now are waiting to finish the public hearings and all that, which should happen in January. So we think that we will be breaking ground and starting to will work sometime in March of next year.

The next question is from the line of Tarang from Old Bridge Capital.

Two questions from my side. One, the source of power and cost of power is obviously a big factor which will drive your upstream capital allocation besides LME. But your -- does your accretion committing in capital to upstream also stems from the fact that as we move forward, a lot of global incremental demand could potentially be fed by secondary metal?

Not really. I think that I think we have discussed this on many calls, the biggest issue for smelter expansion in India is 2 things. One is the availability of your power source and second is the type of power source. We have made commitments from an ESG point of view. So if you are going to announce coal-based expansion of smelting, you're going to have a lot of problems with our investors. But the second point equally is that if you look at the power situation in the country, I'm very nervous about committing a smelter without having a steady power supply that is -- and a power cost that I know of. Because LME, let's say, smelting expansions that are announced at the peak of the curve. By the way, Aditya and Mahan were announced in 2007 when LME was at this peak. So it's fairly risky. So our strategy has always been that we are going to plow this money that we are generating to more and more value-added downstream projects.

Okay. So my second question is, as current incremental production comes on stream, and you discontinue procurement of alumina from some of your other refineries, what kind of margin expansion can we see on our per ton of alumina?

No. Look, I think what I would like to take into account is that Utkal is probably 100% more efficient than the Muri and the Renukoot refinery. But of course, as I've said that some part of that demand, we will try to meet with Utkal, but if we also balance the fact that the Renukoot refinery is tightly integrated, no logistics costs, and it goes straight away. So if you can make a very good margin if alumina prices are at 450, then we do the cost analysis and probably better to sell it in the third-party market.

The next question is from the line of Ritesh Shah from Investec.

Congratulations a good set of numbers. Sir, 2 questions. One is, have you already defined the scope of pump hydro? That's one. And is it replicable across different sites in Asia? That's the first question. Second, related question, anything incremental on the gas supplies costing anything from the government traction?

So on the gas first, the gas pipeline, we are expecting somewhere around January, February for the Sambalpur pipeline to come up. So -- and that's why I think that will be a very important event for us because then we will experiment in Aditya with 50% coal, 50% gas-fired and if that works, then we are making a big step towards our carbon commitment. So we will get to know sometime next year. On the pump hydro, you can't just replicate it everywhere because the provider has to have the ability to pump the water to a reservoir at the height. So currently, we are talking about someone who has that facility, I'm telling about -- I'm talking about giving it to Orissa. So it's not easy to just replicate everywhere because you need to have the ability to pump it hard and then transmit it. But I think if the national grid takes off and some of these cross subsidy renewing charges can be moderated, then you can take it in a place where it's generated and move it in the bridge to anywhere in the country.

Sir, just to check, basically, you indicated 50% gas and 50% coal. This is very interesting. So what should be the indicative pricing on gas that we are looking at? I think earlier you have given numbers on parity, like around $4 only that it makes sense for us. Can you help us sum the company...

Actually, $5 is what would make sense, but it depends also on the coal price and what will happen with the carbon taxes and all that, if it gets introduced. But currently, the parity price is around $5.

Okay. Sir, another question. Sir, how is Novelis Europe placed just in case if Europe comes up with some curbs on exports of nonporous scrap? Is it something which is going to be good for us? We are already self-sufficient and we procure it from the region itself. I'm just trying to make sense of alumin scrap spreads if some change in regulation happens in Europe.

Steve, Dev, do you want to take that?

Sorry. No, we are very self-sufficient in Europe. So we see really no concerns. The largest part of our scrap is really procured from Eastern Europe besides we also buy scrap in the U.K., where we have recycling. So in both these places, we are very, very locally dependent. So we have really no concerns on availability in case of any change of policy.

So it could be a positive for Novelis given the exports will reduce. And it's the same situation which happened in North America versus China a couple of years back.

Yes. So really, I think we'll see what happens. Again, we are getting into speculative territory. But really, all that we would like to say is that our position there in terms of supply, availability and logistics has been steadily very good and we really see no concerns for the future.

Next question is from the line of Kamlesh Bagmar from Prabhudas Lilladher.

Congrats focus side of earnings. So one question on the side of Novelis. So we had guided $1.5 billion of CapEx over last 5 years. So as we are seeing strong demand in North America, so would be the, like say, bring the CapEx beyond that guidance? Or it would be within that guidance?

Steve?

Yes, I think we've talked a little bit this morning about some very significant opportunities in the marketplace driven by the sustainability trends around beverage cans. And so we continue to evaluate those opportunities. And so as Praveen said earlier, we have put out some guidance a year ago. We see more opportunity probably strategically than that guidance, but let us come back in that February time frame, and we'll be able to talk, I think, give more specifics about some of the growth CapEx at the Novelis level.

Okay. Okay. That's helpful. Excellent. But just to set it out. So what clarifications would be there on that part, like the net debt EBITDA or like say, the capital allocation policy, which we had highlighted that what percentage of like say, cash flows will be dedicated on that part? So would there be any color on that?

No, I think the issue that we are talking about is not the percentages. It's that the cash flows that we had talked about in February, the amount of the cash flow is going to be larger. So the point is that you probably will have -- the 1.5% was done as I forget now 55%, 60% of the cash flow. Once that 55% or 60% will be a lot more than 1.5%, I think, is the point that has been made. So I think that as Steve said, we do recognize and I think there's going to be more expansion organic projects. And we will outline that in February. We are working on it now.

Ladies and gentlemen, due to paucity of time, that would be our last question for today. I now hand the conference over to Mr. Satish Pai for closing comments. Thank you, and over to you, sir.

Well, thank you very much. I think we are quite happy that between Novelis and Hindalco, we had a great quarter. I would dare to say that it probably shows the advantage of the integrated model between upstream and downstream now because the downstream is steadily performing, market is good. And when the macro is good, the upstream pitches in. And I see, I think that is what shows in an integrated model that we have delivered a fantastic quarter. So thank you very much for your attention and wish you the best.

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