Hindalco betting big on auto segment

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Mumbai | Published: August 30, 2018 4:19:31 AM

Aditya Birla group company Hindalco Industries is betting big on the high margin automobile segment, and the recent acquisition of Aleris under the company’s US arm Novelis will increase this footprint further, while giving it access to other high-end segments like aerospace and building and construction (B&C).

The shift in the company’s product portfolio over the last 8 years shows that Novelis is moving from a predominantly can and foil manufacturing to products which garner higher margins. (AP)

Aditya Birla group company Hindalco Industries is betting big on the high margin automobile segment, and the recent acquisition of Aleris under the company’s US arm Novelis will increase this footprint further, while giving it access to other high-end segments like aerospace and building and construction (B&C).

The shift in the company’s product portfolio over the last 8 years shows that Novelis is moving from a predominantly can and foil manufacturing to products which garner higher margins. In 2008-2009, auto formed a mere 4% of the entire product offering, while high-end specialities formed 14%, foil 24% and cans the maximum 58%.

However, in the financial year ended March 31, 2018, the share of auto and specialities has jumped sharply to now together form 39% of the product mix (18% in FY09). While cans still hold majority share with 61%, the rate of growth has been slower, though coming on a higher base.

Post the completion of Aleris acquisition, product portfolio of Novelis is expected to diversify further. According to analysts, the share of can for instance could come down to about 47% from the present 61%, while the share of auto could increase a further 200 basis points to 22%. Specialities remaining at 19%, the company will add 8% in building & construction, truck trailer segment, and 4% will get added in the aerospace, an Edelweiss Research points out. Hindalco announced the acquisition of Aleris in July for an enterprise value of $2.58 billion.

Interestingly, both ferrous and non-ferrous industries are trying to grab share in the lucrative automobile, building and construction and infrastructure space.

Automobile sector reported an over 14% growth in FY18 compared to a year ago. While commercial vehicles segment, which constitutes a significant portion in the automotive steel demand, is increasingly being tapped by aluminium companies too. Steven Fisher, CEO and president, Novelis, said that there is absolutely an overlap. “We are trying to penetrate steel’s space and steel is fighting back. They are trying to get higher strength steel and we are trying to get higher strength aluminium and the fact is that aluminium is 1/3rd lighter than steel and that is what will drive it’s consumption,” he told FE recently.

At Hindalco’s India business, benefits from Aleris would accrue through the continuous cast business as Indian markets shift to higher aluminium usage in building and construction and truck trailers. With that in consideration, Hindalco plans to double value added capacity in the next five years, the management told analysts in the conference call held post acquisition announcement.

Satish Pai, managing director, Hindalco Industries, had earlier told FE that building and construction, affordable housing are all the new sectors where aluminium demand is growing. “They need the value added products, and seeing the demand most of our new investments are going into it,” he said. Pai said that while the value added aluminium’s contribution is very low for Hindalco at about 5% of EBITDA, the company wants to swing it to about 15% over a period of 5 years.

Novelis recorded an EBITDA (earnings before interest tax depreciation and amortisation) of over $1.21 billion and shipments of 3.2 million tonne in FY18, compared to an EBITDA of $0.5 billion and flat rolled products shipments of 2.8 million tonne in FY09. Novelis constituted 62% of Hindalco’s consolidated revenues of Rs 115,809 crore in FY18, and 53% of the company’s consolidated EBITDA of Rs 15,025 crore, according to the company’s latest investor presentation.

Hindalco acquired Novelis for an enterprise value of $6.1 billion in February 2007. Novelis has 33 operating plants and 3 research facilities in 11 countries across 4 continents. The company has increased its alumina capacity to 3 million tonne per annum (from 1.5 MTPA) and aluminium capacity to 1.3 mtpa, with total capital outlay of Rs 30,000 crore. These greenfield projects have been ramped up in FY16.

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