We will bring treasury down and use cash to repay debt: Satish Pai

Satish Pai assumed the role of managing director of Hindalco, the aluminium major, in May 2016 after being the CEO of its aluminium business. Since then, he is spearheading a fierce drive to deleverage the company. Hindalco's fourth quarter and annual results that came out on Monday vouch for the "transition" as Pai calls it. In an interview with Vatsala Gaur, Pai opens up about what worked for him and the company, and the way forward for Hindalco. Edited excerpts:

A huge part of the company's recent efforts have been focused on deleveraging. Another payment is scheduled for July. After that, how much of your focus will be on paring debt?
We will continue to focus on deleveraging. I would like the debt-to-EBITDA ratio to be in the low '3's by March of 2018. Right now, we are at 3.74x. And after pre-paying around Rs.2,300 crore in July, which is remaining out of the Rs.6,700 crore prepayment commitment that I had made during the announcement of the QIP, we will be using cash accruals to pare debt. We used to keep around Rs.7,000 crore as treasury (investments), but it is no use keeping that much treasury as the bond yields have come down. So we thought that we will bring treasury down to Rs.4,000 crore and will use the cash to repay debt.

All your plants - Mahan, Aditya and Utkal - are now commissioned and running at full capacities. What can we expect now in terms of expansion?
Our strategy is two-pronged. We will double our downstream capacity from 300 KT to 600 KT over the next five years, because we want to play the value-added part as the Indian economy grows. The primary market is quite competitive, but we have the pedigree of the downstream market compared to our competitors. So we will be spending Rs.5,000 crore over the next five years upgrading our facilities, adding new facilities, etc. And at the same time, we will do a brownfield expansion of Utkal Alumina, which will take 26 months to get completed. We are not considering any expansion of our smelters as of now.

At a time when most heavy manufacturing companies are grappling with high debt levels, you have been able to find a way around it. What has worked for you?
For anything, there is a certain amount of hard work and a certain amount of luck. On the hard work side, we have been running the plants stably and concentrating on manufacturing excellence. It helps that our backgrounds have been of operational excellence. On the luck side, LME picked up, and as it was picking up -this year it was around $1700/tonne during Q2-Q3 — we could d;rop a lot down to the profit because the operations were stable. A second big factor was coal security. Coal linkages came, we were very aggressive... so, that way, any incremental growth in LME d;ropped straight to the bottom line.

With Novelis entering into a JV with Kobe Steel, is that going to change things in any way?
Not really. This is because we had 200 KT of excess capacity at Novelis and, in Asia, we have to bear the brunt of Chinese competition. So we thought it was better to get somebody else to take it, and reduce our fixed cost and get cash and focus on expanding auto.

You said that you have secured two-thirds coal supply, what can we expect on the power front?
There are more auctions happening and I have older linkages that will run out next year. Going forward, I would like about 80-85% (of supply) to be locked up and only about 10-15% on spot (buying).

What markets are you eyeing for your products?
We are expecting 2017-18 to be a strong year for all the government initiatives that were started last year, which means a lot of demand for copper and aluminium in conductors and wires. The three emerging areas are building and construction, transportation sector — electric cars, Talgo trains, which are all aluminium, and packaging.

Right now LME price for aluminium is around $1950/tonne. What is your outlook for its range and sustainability?
It's riding on peoples' belief that China will cut capacity due to environmental concerns. Now, because everybody believes it, the LME is high. When the winter comes, you would know whether it is being cut or not. If they do not cut, then I believe LME will correct a bit. Though demand is also increasing, China has a huge capacity that has to be cut. But, I believe, even if LME will correct, it will not fall below $1700/tonne, and that is good enough for us. In fact, I have budgeted with $1,700, so we are enjoying the high LME prices.

There have been reports — with Tata Steel UK looking for buyers and Novelis’ joint venture with Kobe — that Indian conglomerates are trying to get rid of their overseas assets. Your comment?
Novelis has probably been the most successful Indian acquisition. We did it in 2007, and put in investment, did the shift to auto, and now look at the results: you have $360 million of cash flow. People now say that we disbelieved you, but the results prove that it was probably the best acquisition.