Hindalco bets big on Utkal & Mahan plants to raise output

By Jharna Mazumdar Aug 18 2013 , Mumbai

Aluminium contributes nearly 75% to company's profit

Hindalco Industries will be producing around 3 million tonnes of alumina and 1 million tonne of aluminium from 2014, as production from the company's Mahan and Utkal Alumina will come on-stream. Mahan aluminium smelter, in Madhya Pradesh, is under commissioning and trial production has started. This project includes a smelter-power plant complex, comprising of 359 kilo tonnes per annum aluminium smelter and a 900 mega watt captive thermal power plant. The project has access to the Mahan coal block through a joint venture with Essar Power. Hindalco holds a share of about 3.6 million tonnes per annum in the coal block. Mahan coal block has received stage 1 clearance from Ministry of Environment and Forests and is awaiting stage two clearances. At present, the company produces around 1.5 million tonnes of alumina and around 0.6 million tonnes of aluminium "We are ramping up our production and are hopeful of getting stage two clearance of Mahan coal block within the next couple of months," said Debashish Bhattacharya, managing director at Hindalco Industries. Further, the company is also ramping up production of Utkal Alumina project that would produce 1.5 million tonnes of alumina per annum. The Utkal Alumina project, in Odhisa, is a 1.5 million tonnes refinery with captive bauxite resources of 200 million tonnes. The output from UAIL would be sufficient to feed alumina to the Mahan and the Aditya Smelters, said Bhattacharya. However, the company may not be able to enjoy the benefits of their production ramp-up in the near-term due to the current slowdown in demand and as the company has not yet got the final clearances for the coal block which is a crucial raw material for the Mahan smelter.

In the near-term the aluminium business is expected to witness challenges in the near-term on the back of weak prices of the metal in the global market, said Bhattacharya. Also the interest burden from its project expansions, will have a bearing on the company's earnings in the current financial year. However, for the long-term, the company remain well-placed with addition of large assets to the portfolio and as these projects ramp up to their full potential, the company will witness an exponential growth in volumes and profitability in the years ahead, said Bhattacharya. In the long term, aluminium demand continues to remain strong with global aluminium consumption expected to increase at a compound annual growth rate (CAGR) of 6 per cent over next five years, the company said in its annual report. Aluminium contributes nearly 75 per cent to Hindalco's net profit and 35 per cent to its net sales, whereas copper contributes 25 per cent to profit and 65 per cent to revenue. Analysts too are sceptical on the production ramp-up as the company has not yet managed to secure coal linkages for the smelter. Bhavesh Chauhan, an analyst at Angel Broking, said, "If the company is not able to secure coal linkages then the production from Mahan would result in loses for the company as they won't be able to pass on increase in coal prices to customers. If the company has to buy coal from outside their cost of production will escalate significantly." Sanjay Jain, an analyst at Motilal Oswal, said, although there are challenges in the near-term, the company will benefit in the long-term from production ramp-up.