Crisil revises ratings outlook on Hindalco to stable from positive

Debt-funded Aleris purchase, likely moderation in operating profits amid Covid-19 could push up debt/EBITDA ratio

Crisil has revised the rating outlook on Hindalco Industries' long-term debt instruments to ‘stable’ from 'positive', on the back of likely increase in the company's financial leverage following the debt-funded $2.8 billion acquisition of Aleris Corporation by its subsidiary Novelis Inc.

This, coupled with the moderation in operating profit in the wake of challenges in aluminium markets and the Covid-19 pandemic may take the consolidated net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortisation) to above 3.5 times in fiscal 2021. "This is higher than our previous expectations," said Crisil in its report.

However, ratings at current levels factor in continued strong resilience in Novelis' operations and high cost efficiencies in Hindalco's domestic operations.

While weak aluminium realisations may moderate domestic profitability, the conversion nature of the company's large downstream operations at Novelis (estimated to contribute more than 55 percent to consolidated EBITDA in fiscal 2021) lends stability to Hindalco's aggregate profitability.

The acquisition of Aleris may further increase the share of downstream operations and consolidate Hindalco's global position in aluminium flat-rolled products.

Aleris also provides access to the higher-margin aerospace segment while increasing its share in the building and construction segment.

With most of the capital expenditure (capex) at Hindalco and Novelis behind, Hindalco may continue to generate positive free operating cash flow in the next two fiscals. This may improve financial leverage (net debt to EBITDA ratio) to below three times by end of fiscal 2022.

Divestment of Aleris' manufacturing plants in Lewisport, USA and Duffel, Belgium in line with regulatory approvals and utilisation of proceeds towards debt reduction may result in faster improvement in financial leverage making it one of the monitorables, indicated Crisil report.

In the wake of the Covid-19 pandemic, aluminium demand and realisations have weakened, both globally as well as in India. While lockdown in India has not disrupted Hindalco's domestic aluminium production, some of the auto facilities at Novelis are temporarily closed due to weak demand. The pandemic is likely to impact revenue in the first quarter of fiscal 2021 and may improve in the subsequent quarters subject to the success of the containment measures implemented by the central and state governments.

In this light, Hindalco's ability to sustain its domestic sales volumes through its cost competitiveness, Novelis (including Aleris) sustaining its global shipments on the back of more resilient can volumes and its per tonne profitability through favourable product mix will remain key monitorables. Sharper and more prolonged weakening of profitability most likely owing to continued challenges in aluminium markets may have an impact on Hindalco's ratings.

The ratings continue to reflect Hindalco's established market position in the Indian aluminium industry, strong resilience in business risk profile, driven by robust profitability at Novelis, and cost-efficient domestic operations. These strengths are partially offset by moderately high leverage though partly supported by strong cash liquidity and low debt servicing requirement over next the two years, and susceptibility to volatile metal and input commodity prices.

Cumulative cash accrual are expected at more than Rs 6,000 crore during fiscals 2021 and 2022, against limited repayment obligation of Rs 6 crore and around Rs 300 crore in respective fiscals.

Repayments exclude the one year bridge loan facility availed by Novelis to fund the acquisition, as it is expected to be repaid through sale proceeds from divestment of Aleris' plants in Lewisport and Duffel. Liquid investments were more than Rs 14,500 crore (combined for standalone India business and Novelis) as on March 31, 2020. Additionally, Novelis has around $1000 million unutilised limit under an asset-backed revolving credit.