With ferrous metal product makers enjoying their time in the sun, non ferrous metal product makers are not far behind. One such company is Hindalco Industries, which saw its quarterly consolidated profit triple in Q4FY21 to nearly Rs 2,000 crore on a year-on-year basis. In FY21, consolidated revenues rose by 11.7% YoY to Rs 1,31,985 crore, while profits rose 15.8% YoY to Rs 5,956 crore.

This comes on the back of one of the best quarterly performance in Q4FY21 of its domestic aluminium operations, with the consumption rising 21% YoY to 1,077 kilo tonnes. The performance of the company’s US subsidiary Novelis also surprised analysts with its strong margins and volumes.

The topping on the sundae for the company has been rising LME aluminium prices, which pushed Hindalco to post one its best quarterly profits on a consolidated basis. For context, aluminium prices rose to over $2,500 in early May 2021. Around the same time, Hindalco’s stock rose to its highest level of Rs 427.5. But is this performance sustainable in the face of the new ‘commodity super cycle’? And how should investors look at Hindalco’s prospects going forward?

Novelis leads the way for Hindalco

The demand-supply mismatch in the metals space has helped both ferrous and non-ferrous metal products manufacturers’ performance over the past 12-15 months. Although Hindalco’s Q1FY21 performance wasn’t anything to write home about due to the lockdowns, the company bounced back from Q2 onwards, which included a surge in the volumes of its US-based subsidiary Novelis.

The company’s consolidated earnings before interest, tax, depreciation and amortisation rose 6.8% YoY to Rs 5,597 crore, helped in large part by Novelis and its subsidiary Aleris’ performance. In fact, Novelis posted its best-ever quarterly EBITDA of $ 505 million (Rs 3,705 crore), which includes $ 60 million contribution from Aleris. 

The rise in EBITDA for Novelis in Q4FY21 was helped by all-time high volumes of flat-rolled products of 983 kilo tonnes, a 21% YoY rise. This rise in volumes was due to strong demand across end-product markets.

Even Hindalco’s India aluminium business posted its highest ever quarterly EBITDA of Rs 1,610 crore, a 54% YoY rise, due to better operational efficiencies and lower input costs. For FY21, the India aluminium business saw sales of aluminium metal (1,250 kilo tonnes, down 3% YoY)  almost recoup the Q1FY21 losses, while aluminium value added products (excluding wire rods) posted record sales at 92 kilo tonnes, up 21% YoY. Value added products now make up 28% of India aluminium business, leading to higher EBITDA for the business.

The high demand for aluminium products, backed by stimulus to revive economic growth, across the world will sustain LME aluminium prices at current levels. In the near-term, higher demand, and lower production in China to reduce emissions, will help aluminium prices to remain firm. But the company anticipates cost of production of its India operations to rise due to rising petcoke prices.

High profitability drives aggressive debt reduction

With rising margins and profitability came higher cash flows in FY21. Hindalco’s consolidated cash flow from operations grew by 35.2% YoY to Rs 17,232 crore. The company’s free cash flows doubled to Rs 11,667 crore. The net debt fell by around Rs 14,900 crore to Rs 47,419 crore from its peak in June 2020 at Rs 62,302 crore.

The aggressive debt repayment has helped Hindalco improve its net debt-to-EBITDA ratio over the past few quarters. The company plans to use cash it generates to invest in capital expenditure (capex) for future growth in all its business, and focus on downstream businesses i.e. aluminium alloys like aluminium flat rolled products, extrusions, foil and packaging and other alloys. After that it will use cash to reduce its debt, and then return money to shareholders, in that order. On Hindalco’s investor day in February 2021, the management said they don’t have any large opportunities to make acquisitions to fuel growth.

This cash flow would be after the company takes care of its working capital and maintenance related capex. The broad allocation according to its capital allocation policy will be 50% for growth capex, 30% for debt reduction and 8-10% to be returned to shareholders, and balanced to be retained in the company. The company declared a dividend of Rs 3 per share. In the past many years, the company paid a dividend of less than Rs 2 per share.

Investors should know that the company will see a higher cost of production in Q1FY22 due to higher LME prices of aluminium and copper. The company also plans to complete the 500 kilo tonnes alumina capacity expansion of its Utkal plant by Q2FY22. Once this plant is ramped up, Hindalco plans to  eventually reduce production from Renukoot alumina refinery because it is “quite old” and there are “safety concerns there”, according to the management.

After the Utkal plant is completed, the capex focus will be on downstream products only. Investors will need to see how copper demand picks up in the future to assess how the other leg of Hindalco’s business performs once mines are running in full flow across the world. For now, the company expects aluminium demand to sustain.