CREATING A BRIGHT GLOBAL FOOTPRIN
HINDALCO INDUSTRIES
The company focuses on delivering strong and resilient performance across all the business segments in India as well as overseas while maintaining safe and stable operations and this has reaped rich benefits
Hindalco Industries Limited, the metal-producing flagship company of Aditya Birla Group, is the world’s largest aluminium rolling and recycling company and a major copper player.Hindalco Industries is also one of Asia’s largest producers of primary aluminium. In India, the company’s aluminium manufacturing units comprise the full value chain from bauxite mining, alumina refining, coal mining, captive power generation and aluminium smelting to downstream value addition of aluminium rolling, extruding and foil-making. Its copper facility in India comprises a world-class copper smelter, downstream facilities, a fertiliser plant and a captive jetty.
The copper smelter is among the world’s largest custom smelters at a single location. Hindalco Industries is one of the largest suppliers of copper to the Indian Railways. Novelis Inc., Hindalco Industries’ wholly-owned subsidiary, is the world’s largest producer of aluminium beverage can stock and aluminium automotive sheet as well as the largest recycler of aluminium. Novelis provides innovative solutions to its customers in the beverage cans, automobile, aerospace and high-end speciality markets.
This also includes foil packaging, certain transportation products as well as architectural, industrial, building and construction products and consumer durables. It operates an integrated network of technically advanced rolling and recycling facilities across North America, South America, Europe and Asia. Hindalco Industries’, including Novelis’, global footprint reaches 48 manufacturing units across 10 countries and four continents. Novelis has recycling operations in 15 of these global operating facilities. Currently, Novelis recycles 74 billion cans a year, enough to circle the globe more than 160 times.
Sector Overview
India is one of the fastest growing economies globally, in addition to also being one of the fastest emerging markets. The Indian aluminium industry has been acknowledged as one of the champion sectors that have contributed to this growth. Aluminium has played a vital role in the nation’s economic development and its continued survival is crucial for achieving the government’s movement of achieving self-reliance and making India a USD 5 trillion economy. The aluminium market was valued at USD 147.2 billion in 2018, and is expected to reach USD 189.8 billion by 2026, registering a CAGR of 3.2 per cent from 2019 to 2026. The growth of the global aluminium market is driven by development in the transport industry.
It is also triggered by technological advancements in aluminium manufacturing technologies and processing equipment, and increase in the usage of aluminium in various industries such as building and construction and foil and packaging. In the current scenario, shares of metal companies, especially aluminium, are emerging as biggest gainers in an otherwise volatile market. The rally in the mining sector was underpinned by fresh western countries’ sanctions against Russia for its invasion of Ukraine, which raised concerns about supply disruptions. As per a CRISIL Research report, Russia and Europe together account for nearly 10 per cent of global aluminium supply. The advanced conflict in the eastern European region is likely to disrupt supply, which may provide opportunities for other exporting countries like India to fill the gap.
Financial Overview
Considering the performance of the company recorded for the third quarter of FY22, on a consolidated basis the company recorded net sales and other operating income of ₹ 50,272 crore, reporting growth of 43.81 per cent from ₹ 34,958 crore posted in Q3FY21. On the other hand, the operating profit recorded at ₹ 7,493 crore in Q3FY22 as compared to an operating profit of ₹ 5,521 crore in Q3FY21.
Q3FY22 recorded net profit of ₹ 3,672 crore in comparison with net profit of ₹ 1,875 crore in the same quarter in the previous year, giving a strong rise of 95.84 per cent. On the annual front, its net sales and operating income grew by 11.72 per cent from ₹ 1,18,144 crore in FY20 to₹ 1,31,985 crore in FY21.
The operating profit advanced by 21.08 per cent in FY21 as compared to FY20, recording at ₹ 18,758, crore compared to ₹ 15,492 crore. On the contrary, the net profit declined by 7.57 per cent in FY21, recording ₹ 3,478 crore as compared to ₹ 3,763 crore in FY20. In terms of CAGR, net sales are growing at a CAGR of 21.1 per cent while operating profit at a CAGR of 50 per cent and net profit at 58.4 per cent. An average 22.3 per cent sales growth indicates that the near-term sales trend is likely to be positive. Analyzing the other financial parameters, the company has been able to generate on an average return on capital employed (ROCE) of 10.01 per cent, thus displaying average profitability per unit of total capital i.e. equity and debt. The company has recorded a dividend payout ratio of 5.89 per cent. The tax ratio of the company stands at 31.05 per cent.
This indicates that the profits generated by the company are real and adequate contributions are made by the company by paying due taxes. The interest coverage ratio which conveys ability to make interest payments, for the company stood at 8.6 times, which was seen to be highest in the last five quarters. Also, a higher EPS (earnings created for the shareholders by the company) as compared to the last five quarters throws light on Hindalco Industries’ increasing profitability.
A lower debt to equity ratio of 0.96 times depicts that the company has been reducing its borrowing as compared to equity capital. Institutional Investors have superior ability to analyse any fundamentals of a company than the retail investors. A higher institutional holding of 45.55 per cent conveys an optimistic outlook from these investors regarding future of the company.
In April 2020, the company announced the completion of Aleris Corporation’s acquisition by its wholly-owned subsidiary Novelis Inc. The acquisition of this US-based rolled products’ major has positioned Hindalco Industries as one of the world’s largest aluminium companies with a global footprint spanning 49 state-of-the-art manufacturing facilities in North America, Europe and Asia.
Outlook
Hindalco Industries’ focuses on delivering strong and resilient performance across all the business segments in India as well as overseas while maintaining safe and stable operations. The company’s business is catching up with a sharp recovery of the market, supported by improved macros. The cost competitiveness of Hindalco Industries’ smelters continues to position it in the first quartile of the global cost curve. In April 2020, the company announced the completion of Aleris Corporation’s acquisition by its wholly-owned subsidiary Novelis Inc. The acquisition of this US-based rolled products’ major has positioned Hindalco Industries as one of the world’s largest aluminium companies with a global footprint spanning 49 state-of-the-art manufacturing facilities in North America, Europe and Asia.
The Aleris Corporation integration is providing accelerated synergistic benefits, coupled with positive EBITDA contribution as it continues to unlock and capture the entire value of this acquisition. This year, Aleris Corporation contributed around USD 200 million to EBITDA, including synergies. The capacity expansion project of 500 KT at its Utkal alumina refinery will further help in reducing the overall integrated cost of production. The company’s long-term strategic investments in Novelis and the India downstream expansion projects will enhance its capabilities across the FRP and extrusion segments in India.
Novelis has invested approximately USD 700 million since FY11 to grow its total recycling capacity to approximately 2.5 million tonnes. The company is also identifying additional recycling and casting investments over the next five years to improve recycling content and increase casting capacity. Hence, considering the company’s relentless focus on product innovation, better efficiencies, complete digitalisation, organic expansions with a diversified product mix and cost competitiveness, we recommend BUY.