Aditya Birla’s World Cup cheer: sales of beverage cans up 15%

Ruchira Singh
Live Mint
05 July 2014

A warmer weather in Brazil has led to higher sales of beer cans, much of them made using aluminium from Novelis

Mumbai: A few months ago, when football players around the world had their minds set on scoring goals at the Fifa World Cup in Brazil, executives at the Aditya Birla Group had a different set of goals in mind linked to the world’s most popular spectator sport.

These top executives at the group’s flagship Hindalco Industries Ltd didn’t have their eye on goal posts or strikers. Instead, they were watching the weather, wishing it would get really hot in Brazil—at least for the grand games.

The reason: the warmer the weather, the higher the sales of beer cans, much of them made using aluminium from Hindalco’s foreign unit Novelis Inc.

“If the weather is cold, then it would be one thing. If the weather is sunny, then it would be another thing,” Debu Bhattacharya, managing director of Hindalco and vice-chairman at US-based Novelis, said in an interview on 29 May when asked how many cans were expected to be sold.

“Sunny will help. When it is cold, they don’t go to the beach at all. It is possible that they consume it in the stadium, but the major consumption of beer is on the beaches,” he added.

Bhattacharya couldn’t have asked for more. With the Fifa World Cup now well under way, it is as if Hindalco was awarded a goal kick. The weather in the South American host country is hotter than usual, which means more demand for chilled beer in cans made out of Novelis’s aluminium.

Soaring temperatures have forced World Cup organizers to call for drinks breaks in the middle of matches. A Brazilian labour court, too, ordered cooling breaks. According to Bloomberg, Fifa uses as its indicator the Wet Bulb Globe Temperature—a composite measurement used to estimate the effect of temperature, humidity and wind speed. Should the indicator exceed 32 degrees Celsius, drinks breaks would take place, Michel D’Hooghe, head of Fifa’s medical committee, said before the tournament started on 12 June.

In new data provided by Hindalco, World Cup-led sales of can stocks by Novelis rose 15% in January-March against the same quarter a year ago, as beer and non-alcoholic beverage makers started to prepare for the tournament. While he declined to give data for the quarter ended June, Bhattacharya added that the March quarter growth is a reflection of the higher demand in the region, some of it attributable to the World Cup.

“Beer production in Brazil increased 12% year-to-date to May 2014 versus May 2013. High temperatures, carnival and World Cup-related orders have contributed to this sales increase,” he said.

Tough fight
Much like the contesting teams with years of hard work behind them, Novelis’s World Cup dreams started in 2010 when it began to invest $340 million (around Rs.2,000 crore today) to double its Brazil plant’s capacity to the current level.

Novelis now has an integrated hot rolling, cold rolling and recycling complex in Pindamonhangaba in the state of Sao Paulo, mid-way between the cities of Sao Paulo and Rio de Janeiro, with a capacity of 600,000 tonnes of aluminium sheet per year, according to the company’s website.

“The World Cup will be positive for them because the sale of beverage goes up and they are quite leveraged towards the beverage market,” said Chirag Shah, director (equity research) and head analyst (building materials, metals and mining) at Barclays Capital. “And 60% of Novelis’s sales comes from beverage cans.”

But the cheer and revelry surrounding the World Cup may be transient.

For a company operating across 11 countries, the profit impact of higher sales in Brazil may not be substantial, said analysts, as the football-crazy nation contributes 17-18% to Novelis’s overall sales.

“It is going to be material, but not very large to change numbers. It will be a good tail-wind,” said Shah.

Shah and another analyst, Giriraj Daga of Nirmal Bang Equities Pvt. Ltd, said they saw net profit rising a couple of percentage points owing to the tournament, being played in 12 cities, including Rio de Janeiro and Sao Paolo.

For fiscal 2013-14, Novelis saw its profit fall to $104 million from $203 million a year ago. Revenue also came in lower at $9,767 million in 2013-14 against $9,812 million a year ago. At the end of March, Hindalco’s consolidated net debt stood at Rs.51,636.22 crore.

Analysts said while the spectator sport will give Hindalco the morale boost it needs, its big bet lies in the production of aluminium for automobiles, which has a real growth potential and, in some cases, gives better margins than cans.

But for Hindalco’s Bhattacharya, the brain behind the company’s aluminium push overseas and in India, a team of strong performers is better than one star performer.

“Our objective is to not rely on only one sector because if it goes for a downturn, the company will suffer. What we found out in 2008, when Lehman Brothers went down, (was that) the can sales did not suffer much because certain products in a depressed economic situation actually sell more,” Bhattacharya said. “They can’t buy a car, but they would like to buy small things which would make their lives fun.”

With that philosophy in mind, Hindalco is now preparing for its next big goal—the 2016 Summer Olympics, also to be held in Brazil.