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Edited Transcript of HINDALCO.NSE earnings conference call or presentation 9-Aug-19 10:30am GMT

Q1 2020 Hindalco Industries Ltd Earnings Call

Mumbai Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Hindalco Industries Ltd earnings conference call or presentation Friday, August 9, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Praveen Kumar Maheshwari

Hindalco Industries Limited - CFO & Whole Time Director

* Satish Pai

Hindalco Industries Limited - MD & Executive Director

* Steven R. Fisher

Hindalco Industries Limited - CEO & President of Novelis Inc.

* Subir Sen

Hindalco Industries Limited - Deputy GM & Head of IR

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Conference Call Participants

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* Abhijit Mitra

ICICI Securities Limited, Research Division - Analyst

* Amit A. Dixit

Edelweiss Securities Ltd., Research Division - Financial Analyst

* Anuj Singla

BofA Merrill Lynch, Research Division - VP in Equity Research

* Ashish Kejriwal

IDFC Securities Limited, Research Division - Research Analyst

* Bhavin Chheda

Enam Holdings Pvt. Ltd - Analyst

* Dhruv Muchhal

Motilal Oswal Securities Limited, Research Division - Research Analyst

* Kamlesh Bagmar

Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst

* Pinakin M. Parekh

JP Morgan Chase & Co, Research Division - Associate

* Rajesh V. Lachhani

HSBC, Research Division - Analyst

* Sumangal Nevatia

Kotak Securities (Institutional Equities) - Analyst

* Vikash Singh

PhillipCapital (India) Pvt. Ltd., Research Division - VP of Metals & Mining

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Hindalco Industries Limited Q1 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Subir Sen from Investor Relations of Hindalco. Thank you, and over to you, Mr. Sen.

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Subir Sen, Hindalco Industries Limited - Deputy GM & Head of IR [2]

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Thank you, and a very good day to everyone. On behalf of Hindalco Industries Limited, I welcome you all to this earnings call for the first quarter of FY '20. On this call, we have -- we will refer to our latest Q1 investor presentation available on our website. Some of the information on this call may be forward-looking in nature and is covered by the safe harbor language on Slide #2 of the investor presentation.

We have presented the consolidated quarterly financials, including all segments of India business and our overseas subsidiary, that is Novelis. This will provide you a comprehensive view of all our businesses.

For this purpose, standard principles of consolidation have been applied (inaudible). For comparison purposes, all factored consolidated financial numbers are being presented in a similar manner.

On today's call, we have with us from the Hindalco management, Mr. Satish Pai, Managing Director; Mr. Praveen Maheshwari, Chief Financial Officer and CEO of Corporate Business. From the Novelis management, we have Mr. Steve Fisher, President and CEO.

Now I will hand over this call to Mr. Satish Pai for his opening remarks. Thank you, and over to you, sir.

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [3]

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Thank you, Subir. Good evening or morning, everyone. Welcome to our earnings call for the first quarter of FY '20 of Hindalco Industries Limited. We have published our consolidated quarterly financials, including all the segments of India business and Novelis for a broader view of the company.

Let's move to Slide 3. I'll begin with the key highlights of the company's overall performance in Q1 FY '20. This will be followed by an update on the macroeconomic and industrial environment. Later Praveen will cover our operating and financial performance of all our businesses in detail.

Let me start with the key highlights of Q1, starting with Slide #5. So Hindalco showcased a resilient consolidated quarterly performance despite a very challenging business environment. This performance was a result of another record results achieved by Novelis, stable operating performance by the Indian aluminum segment and a sustained performance by the copper business.

Let me start with Novelis and give some key highlights of its performance for Q1 FY '20. Novelis reported a record adjusted EBITDA of $372 million in Q1 FY '20, up 11% year-on-year, and an all-time high adjusted EBITDA per ton of $448 in Q1 FY '20, up 7% year-on-year.

Net income, without exceptional items, in Q1 FY '20 was best ever at $145 million, up 26% year-on-year. The overall shipments were 830 Kt in Q1 FY '20 compared to 797 Kt in the prior year.

On the Aleris acquisition, the approvals are in progress. The deal is expected to close in Q3 of FY '20.

Moving to the Hindalco India business. Stable operations have led to alumina and aluminum metal production of 686 Kt and 326 Kt, respectively, in Q1 FY '20. The global aluminum prices have dropped significantly by around 21% year-on-year to an average of $1,793 in Q1 FY '20.

The aluminum business, including Utkal, reported an EBITDA of INR 899 crores versus INR 1,532 crores in the prior period. This drop in EBITDA was mainly on account of lower realization. The EBITDA margin stood at 16% in Q1 FY '20, which is one of the best among our global peers in this challenging business environment.

Aluminum VAP, excluding wire rod production, was flat at 79 Kt in Q1 FY '20 compared to the corresponding period in the previous year. The impact of the Muri Alumina refinery closure in Q1 FY '20 was partially mitigated by higher production of alumina at Utkal refinery. Brownfield expansion of Utkal Alumina by 500 Kt is on track and expected to be commissioned by mid-FY '21.

Coming to our copper business on Slide 6. It recorded its highest ever quarterly production of copper CC Rod at 66 Kt and a scale of 63 Kt. EBITDA was at INR 267 crores in Q1 FY '20 versus INR 347 crores in Q1 FY '19. This was lower year-on-year due to lesser production on account of the planned maintenance shutdown and lower realization. The copper smelter-3 ramped up smoothly post the maintenance shutdown.

Let me now take you through our consolidated performance for the quarter. Hindalco reported its consolidated EBITDA of INR 3,770 crores for the quarter compared to INR 4,335 crores in the prior year quarter. The consolidated PBT stands at INR 1,578 crores as against INR 2,275 crores in Q1 FY '19. The consolidated profit after tax was INR 1,063 crores compared to INR 1,475 crores in Q1 FY '19. The long-term loans remained unchanged from FY '19 end. The consolidated net debt-to-EBITDA stands at 2.69x at the end of June 2019 as against 2.48x at the end of March 2019.

Let us now take a look at the broader economic environment. The global macroeconomic activities -- I'm on Slide 8. The global macroeconomic activities continues to get affected by the prolonged trade war between U.S. and China. Recently, the U.S. has imposed an additional tariff on $300 billion of Chinese imports, which were not covered under U.S. tariffs earlier.

In Europe, the uncertainty around Brexit is also impacting regional economic growth adversely. In Q2 CY '19, the Chinese economy registered the slowest growth in 27 years at 6.2% year-on-year from 6.7% in the previous year's corresponding period.

The Eurozone economic growth moderated to 1.1% year-on-year in Q2 CY '19 versus 1.2% year-on-year despite the fall in the unemployment rate to 11 years' low. The economic growth also came under pressure in the U.S. during Q2 CY '19 as GDP growth moderated to 2.1% year-on-year from 3.5% in Q2 CY '18.

Increase in consumer and government spending supported the growth in Q2 CY '19 in the U.S. Due to the subdued macroeconomic conditions, the governments and central banks across regions are adjusting their policies to support growth.

According to the IMF, global growth is likely to moderate from 3.6% in CY '18 to 3.2% in CY '19. The domestic economy in India also slowed down as GDP growth moderated to 5.8% year-on-year in Q4 FY '19 versus 8.1% year-on-year in Q4 FY '18. This moderation was majorly driven by low consumption and subdued investment. In the recent monetary policy statement, the RBI has reduced the key interest rates by 35 bps to 5.4%. This is the third rate cut in a row in the current financial year. The reduction of rate cuts is expected to revise aggregate demand leading to private investment in the economy. According to the RBI, the Indian economy is likely to grow by 6.9% in FY '20 versus 6.8% in FY '19, with a probability of more downward rates.

Let me take you through the aluminum industry overview on Slide 9. Further escalation of the U.S.-China trade war has dampened the global economic environment. As a result, aluminum consumption and prices were negatively impacted.

In H1 2019, primary aluminum consumption growth moderated to 0.1% year-on-year from an increase of 3.6% year-on-year in H1 2018. The world, excluding China, reported a decline in consumption growth to 0.3% in H1 2019 year-on-year from an increase of 2% in H1 2018 year-on-year, owing to subdued demand in the Middle East, Europe and North America.

The Chinese demand also underwent moderation in H1 2019 to 0.4% year-on-year as against 5% year-on-year in H1 2018. China domestic demand remains unresponsive to the announced stimulus, barring the construction sector.

China also exported around 3 million tons of aluminum in all fronts, an increase of 10% in H1 2019, primarily to the E.U., Japan, India, Vietnam and Malaysia. Global consumption growth is expected to be around 0.5% to 1% in 2019, with the market balance remaining in deficit of about 1.2 million tons.

Given the subdued domestic macroeconomic environment and sentiment, growth moderated from 11% year-on-year in Q1 FY '19 to 7% year-on-year in Q1 FY '20. We have observed the moderation in demand in user industries like automotive, construction and electrical sectors. The slowdown in these sectors was primarily driven by tight liquidity conditions in the domestic market.

Imports continue to be a cause of concern for domestic players in India, as the market share of imports is still high at 59% in Q1 FY '20. The overall imports, including scrap, is at 585 Kt in Q1 FY '20 as compared to 555 Kt in Q1 FY '19, registering a growth of 5% year-on-year, majorly driven by the surge in scrap imports to 8% year-on-year to 339 Kt.

Going forward, with the further intensification of the trade war, coupled with the continued emphasis on downstream production and exports by the Chinese government, this will likely result in a surge of imports into India. With China imposing restrictions on scrap imports, more scrap could also flow into India.

In CY '19, in Slide 10, the global FRP demand is likely to grow by 3%. Global can stock has started to grow, with demand increasing on account of continued shift from glass to can, new end-use segments like energy drinks, sparkling water and craft beer in aluminum packaging. This has resulted in a strong mid- to long-term growth of 3% in the beverage can market.

Continuous adoption of strong, lightweight and formable aluminum sheets in vehicle parts and structures is leading to growth in the Automotive Body Sheet segment. This market is expected to grow at a CAGR of 12% between CY '18 and CY '25.

Domestic FRP demand is currently growing at a steady pace of 4% year-on-year in Q1 FY '20, primarily driven by construction and packaging segments. This is expected to grow at a CAGR of 7% between CY '18 and CY '22.

Moving to Slide 11. The U.S.-China trade dispute, strong U.S. dollar, moderate economic activity also kept the copper -- global copper prices subdued in H1 2019. Global refined copper demand was lower in H1 2019 due to subdued industrial activities across all geographies, especially in China and Europe.

During the period, demand recorded marginal growth of 0.5% year-on-year versus 4% year-on-year growth in H1 2018. The global market for refined copper in 2019 is likely to remain subdued and is expected to grow below 1% as compared to 3% growth in 2018. Refined copper market was primarily balanced in H1 2019 and is likely to remain the same during the current year.

On the supply side, the copper concentrate market was largely balanced in H1 2019, as part of the spending capacity in China was on planned maintenance shutdown. However, the concentrate market has tightened significantly during end of H1 2019, as mines production was affected by disruptions at Grasberg in Indonesia, Las Bambas in Peru and in the African Copperbelt.

On the demand side, 1.3 million tons of new smelter capacities are coming online in China. As a result, the above-mentioned factors have led to moderation in the TC/RC and lower smelter profitability.

In the domestic market, consumption grew by 9% year-on-year to 188 Kt in Q1 FY '20. Imports from ASEAN and other FTA countries continued to put pressure on the domestic pricing. Imports grew by 11% to 79 Kt in Q1 FY '20. As a result, the overall market share of imports in the domestic market increased from 38% in Q4 FY '19 to 42% in Q1 FY '20. Major imports happened in wire rods category.

Praveen will take you through the business performance highlights of each of the business segments in Q1.

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Praveen Kumar Maheshwari, Hindalco Industries Limited - CFO & Whole Time Director [4]

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Thanks, Satish. Coming to Slide 14, Novelis delivered its best-ever quarterly performance, with a significant rise in adjusted EBITDA, adjusted EBITDA per ton and net income in Q1 FY '20. This performance was on the back of strong operating performance with favorable market conditions.

The global demand for aluminum FRP remains strong, as is reflected in the growth of overall shipments that grew by 4% Y-o-Y in Q1 FY '20. All the organic expansion projects of Novelis in the U.S., China and Brazil are progressing on time and budget. All these are expected to be completed as further scheduled.

Slide 15 shows an excellent quarterly performance of Novelis in financial terms in this quarter. Adjusted EBITDA at $372 million. EBITDA per ton at $448, which grew 11% and 7% Y-o-Y in Q1 FY '20, respectively, the highest level in any quarter so far.

Slide 17 shows the detail of the performance of the Indian aluminum business, which includes Utkal. Alumina production in Q1 FY '20 was 686 Kt. Metal production was at 326 Kt, reflecting stable operations. Value-added products, excluding wire rods, in this quarter reached 79 Kt versus 78 Kt in the last year.

Turning to Slide 18. Aluminum metal sales volumes were at 320,000 tons in Q1 FY '20 versus 300,000 tons in the previous year. The VAP sales, excluding wire rods, were up 13% Y-o-Y at 77 Kt in this quarter. Share of value-added products in total sales has improved to 24% in this quarter versus 23% in last year.

Moving on to the financial performance of the Indian aluminum business on Slide 19. This segment recorded a revenue of INR 5,472 crores in Q1 FY '20 versus INR 5,668 crores last year. This was lower due to lower LME in Q1 FY '20. EBITDA in Q1 FY '20 was at INR 889 crores versus INR 1,532 crores in quarter 1 FY '19. The EBITDA margin, however, stood at 16% of revenue, one of the best amongst the global peers.

Moving to the copper business, on Slide 21. The overall copper metal production was lower at 76,000 tons in this quarter compared to 81 Kt in Q1 FY '19. This drop was mainly due to a planned maintenance shutdown in Q1. Quarterly production of CC Rod, however, was the highest ever at 66 Kt in Q1 FY '20, supported by the newly commissioned CCR-3. DAP production was 36 Kt in Q1 FY '20 versus 70 Kt last year, lower due to planned maintenance shutdown and certain operational issues.

Turning to Slide 22, on sales volume of the business. Copper metal sales were at 82,000 tons in Q1 FY '20. CC Rod sales in Q1 '20 were higher by 3% Y-o-Y at 63,000 tons.

On Slide 23, the financial performance of the copper business is given. Revenue was INR 4,593 crores in Q1 FY '20 versus INR 5,012 crores last year. This was marginally lower year-on-year due to lower LME and the impact of a planned maintenance shutdown.

EBITDA stood at INR 267 crores in this quarter versus INR 347 crores in Q1 of last year. This was comparatively lower on account of lower byproduct volumes and realizations in Q1 FY '20.

Let me now hand over to Satish to give you a brief on our consolidated results and a summary.

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [5]

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Thanks, Praveen. On Slide 24, Hindalco reported its consolidated quarterly results for Q1 FY '20. The company reported a revenue of INR 29,972 crores, EBITDA of INR 3,769 crores and a PBT before exceptional items of INR 1,578 crores and a PAT of INR 1,063 crores in Q1 FY '20. The detailed quarterly comparative financial numbers are attached as an annexure on Slide 28 of this presentation.

Hindalco standalone, including Utkal, reported a revenue of INR 10,055 crores, EBITDA of INR 1,275 crores and a PAT of INR 167 crores in Q1 FY '20. These details are also provided as an annexure to this presentation on Slide 29 for your reference.

So let me now summarize on Slide 25 Hindalco's sustainable business model. This resilient performance in Q1 FY '20, despite challenging business environment, reflects the strength of our balanced portfolio, our integrated business model and our excellent operational capabilities, along with our enriched portfolio. This sustainable model is driven by: number one, a balanced product portfolio. Even with low LME during the quarter, the company delivered an EBITDA of INR 3,769 crores, with 79% of this EBITDA from non-LME linked conversion business.

Hindalco's resource security, the fully integrated aluminum business model, is providing support in low commodity cycles. In copper business, its long-term contracts with the miners assures uninterrupted supply of copper concentrate. Operational excellence also helped to reduce costs in challenging times to deliver superior performance. Novelis' continued focus on optimizing manufacturing operations and product mix has also helped Novelis to maximize its capacity in favorable market conditions and deliver its best performance consistently.

The consolidated net debt-to-EBITDA is well below 3x at 2.69x at the end of June 2019. This was achieved by deleveraging in the last 3 years, providing strength to the balance sheet.

So thank you very much for your attention, and we open the line now for questions that you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Amit Dixit from Edelweiss.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [2]

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I have two questions. The first one is on the hedging book going ahead. And the second one is with respect to Muri plant. We have taken certain exceptional items with respect to that. So is the maintenance -- is the repair complete? Or do we -- can we expect something else going forward? And similarly, is the increased volume from Utkal sustainable?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [3]

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All right. So let me take your question #1 first. So for the remaining 3 quarters of FY '20, we are -- 15.7% of the total is hedged at $2,191 per ton. So of this 15.7%, 11% is rupee LME at 1 lakh 53,137 and 4% is only commodity at USD 2,260 per ton. So that's our hedged position. Now also 31% of the currency is hedged at INR 75.4 crores for the remaining 3 quarters. So that's our hedged position.

Coming to Muri. So we -- I'm happy to report that we have now cleaned up the whole spill and in fact have started the process for the restart, which I think should happen by late September. The impact in quarter 1 was a total of INR 80.5 crores. And as you may have noticed, INR 47 crores, we took as an exceptional item because these were what we felt was a onetime, which was cutting away the red mark, which was the largest part of that. And INR 33 crores was taken in the EBITDA. So the results had an INR 80.5 crores impact in Q1.

I think going forward, we do not have any more impact from a cleanup. The impact that we will have in the (inaudible) in Q2 is that before we start, we will still have the fixed costs of the Muri refinery and the mines and also any delta because of the imported alumina that we will need for the coming few months. So my estimation of the impact in Q2 is around INR 50 crores. But I think I'm happy to report that the Muri thing is more or less cleaned up now and hopefully will be starting by September.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [4]

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And INR 50 crores EBITDA, none of it is exceptional items? The repair and everything is complete?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [5]

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That's right. I don't think that in Q2, there will be any more exceptional items.

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Operator [6]

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The next question is from the line of Pinakin Parekh from JPMorgan.

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Pinakin M. Parekh, JP Morgan Chase & Co, Research Division - Associate [7]

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So just going back to your comments on the India aluminum demand. And you mentioned that while demand is still holding out at 7%, the domestic market share of scrap has kept on increasing. So what are the biggest update that you -- with the government in regards to the policy of aluminum in India? Do you think we can expect some kind of protection for the domestic aluminum industry? Or will the [this just] continue?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [8]

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So there are 2 aspects to what the government is now dealing with. One is the asset negotiations because majority of the imports, not on the scrap, but all the downstream finished goods, actually comes from ASEAN and China. So the asset negotiations that the Aluminum Association is deeply involved with, the government, as you can see, is taking quite a firm stand. And we are hopeful that large number of the lines will be in the exclusion list or on very long periods of -- before the duties go down.

So the asset negotiation is one way that the government is looking at to slow down the imports. And the second very important thing that they are now very seriously working on is the scrap standards. So the scrap standards are being looked at because what's happening is the largest driver for scrap into India was the automotive sector.

Now the automotive sector, as you know, is slowing down. But now the scrap that's coming in, because the arbitrage is so big, is going into things like electrical wires and utensils, which it should not. So we are working with the [VTIO], VIX to get a scrap standard in place. And the government is I feel quite pleased now to get that standard in place, which I think will have an impact to make sure that the scrap does come in, but it goes to the right end-use industries.

Pinakin, did that answer your question?

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Operator [9]

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Pinakin Parekh, can you hear us?

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Pinakin M. Parekh, JP Morgan Chase & Co, Research Division - Associate [10]

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Yes. Sorry. Yes, (inaudible) update, can you fill us in on the coal situation regarding what has happened in Coal India's (inaudible) coal fee and how has -- if it has impacted Hindalco's coal sourcing and costs?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [11]

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No. Actually, we don't get too much coal from purchase. So I am happy to say that our coal costs actually have been slightly lower compared to Q4. And quite happily, we are going into the remaining quarters with adequate coal stocks. Even the rigs, we have been using quite well. So actually, for us, the availability of coal is not an issue at all, Pinakin, at this point.

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Operator [12]

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The next question is from the line of Anuj Singla from Bank of America Merrill Lynch.

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Anuj Singla, BofA Merrill Lynch, Research Division - VP in Equity Research [13]

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Mr. Pai, two questions on aluminum. Firstly, during the course of this quarter, what kind of cost decline or cost change have you seen on the aluminum cost of production Q-o-Q?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [14]

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Yes. So following on from the question of Pinakin on coal, so 3% down Q1 to Q4. So we have already seen a 3% more coming down. Now besides coal slightly going down, the CP coke pitch has also gone down between 5% and 7%. And in Q2, we'll start to see the impact of caustic also going down because caustic, our contracts are 2 minus 1, but caustic prices have also moderated.

So I think that from a cost perspective, which I guess includes commodity prices coming down, our input costs are also now moderating downward.

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Anuj Singla, BofA Merrill Lynch, Research Division - VP in Equity Research [15]

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Okay. So if we were to look at this year of -- for FY '20 for the next 3 quarters, obviously, the LME prices don't seem to be -- there should -- don't seem to be any takers to move them up at this point of time, given the global recessionary fears. So what kind of cost efficiencies we can expect to see in the numbers which can probably support our profitability going through this difficult time?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [16]

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Yes. That's a good question. I think that with the oil prices, I can see now furnace oil and some of the carbon-related products also going down. Imported coal prices are also heading down because what we are doing right now, I mean, I guess, let me also tell you our coal mix because the linkage coal was at 63%, the option was at 24%. Our own mines were at 10% and imports were at 3% for this quarter.

What's happening now is that our own mines production we are slowing down and we are importing coal because international prices of coal are coming down. So I believe that going forward, the aluminum EBITDA should be around the INR 900 crores if LME continues at today's level.

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Anuj Singla, BofA Merrill Lynch, Research Division - VP in Equity Research [17]

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Understood. Lastly, a question for Mr. Maheshwari. Sir, can you just remind us what is the debt levels or the net debt levels we have for this quarter on a consolidated basis?

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Praveen Kumar Maheshwari, Hindalco Industries Limited - CFO & Whole Time Director [18]

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Yes. So on a consolidated basis, the net debt stands at about INR 59,868 crores, including Novelis.

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Operator [19]

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The next question is from the line of Rajesh Lachhani from HSBC.

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Rajesh V. Lachhani, HSBC, Research Division - Analyst [20]

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So next question is with regards to the copper segment. So we have seen, due to the maintenance shutdown, the copper price has come down. So I just want to understand, does it change your guidance for the full year, which was 400 Kt earlier?

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Praveen Kumar Maheshwari, Hindalco Industries Limited - CFO & Whole Time Director [21]

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Not significantly, I would say. We will see as we go down. But the good part is that the ramp-up of the smelter has come back pretty smoothly and they're running fine. So currently, I think on an ongoing basis we are doing fine.

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Rajesh V. Lachhani, HSBC, Research Division - Analyst [22]

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So can I assume Q2 production was close to -- will be closer to normal level of 100 Kt? Or is there some production disruption, supply disruption in Q2 as well?

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Praveen Kumar Maheshwari, Hindalco Industries Limited - CFO & Whole Time Director [23]

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Versus Q2, we are looking at 90 to 100 Kt in this quarter. We had kind of rains, which were -- which impacted our production just last week. So we are looking at about 90 to 100 Kt for this quarter. We are trying to make it up.

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Operator [24]

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The next question is from the line of Abhijit Mitra from ICICI Securities.

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Abhijit Mitra, ICICI Securities Limited, Research Division - Analyst [25]

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First question is in relation to the scrap and increasing scrap imports, which I think was shown in Slide 10. I'm just curious whether this demand of scrap and primary aluminum, are they absolutely fungible? I mean is it true to say that they're eating into your demand? Or there are sort of segregated areas where these 2 elements work?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [26]

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So look, the scrap weight was -- that majority, let's say 70% of it actually goes into making alloy index of the auto market. I think that part you can say really does not have any overlap with mostly our business or the domestic products that we serve. What has happened ever since the last, let's say 1.5 years is that after the U.S.-China trade war, where China stopped importing U.S. scraps, the prices of scrap and the spreads have benefited. This, by the way, has benefited Novelis as well. But the scrap imports coming into India has sharply jumped up from the U.S.

And the point of this is that it's not just the auto anymore. It's going into -- people are using that as a replacement for primary metal in end-use segment where they should not, like the electrical wire sector or the sensor sector. So there are some sensitive sectors where the scrap is going in and then creating a little bit of public concern as well. So I guess this is the part that a scrap standard and end-use certificate and things like that are being looked at.

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Abhijit Mitra, ICICI Securities Limited, Research Division - Analyst [27]

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Yes. And understanding if that is silver mainly, which is coming in. So silver, can we use in those, as in wires and utensils around?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [28]

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Yes. It is being used. That's the problem.

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Abhijit Mitra, ICICI Securities Limited, Research Division - Analyst [29]

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Okay. And the second question is -- I mean this concern has been raised, I think, in the past also. But given that there is a very significant cash bond that we are seeing in your group entities, namely Idea. So are there any safeguards that you're creating to sort of shield any further investment into the entity? I mean can -- as analysts or investors, we look forward to any sort of safeguard that Hindalco is sort of putting forward that no more investments, no more money transfer is going to happen to sort of other linked entities.

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [30]

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Look, I think I've been very transparent. The only investment we did was participate in the right issue of Idea where we held 2.6%. And I think I've been very transparent saying we didn't want to go dilute our position there. But let me assure you very categorically that there is absolutely no other investment plan by Hindalco into any of the group companies.

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Abhijit Mitra, ICICI Securities Limited, Research Division - Analyst [31]

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Okay. And lastly on the P&L side, the reported conso financials that you have sort of published, there seems to be some elimination. So if I add the index number of Novelis and -- standalone, including Utkal, there's a INR 200 crore gap that I see. Is there some sort of an elimination at play here as in -- which is sort of feeding into that conso number -- conso EBITDA number?

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Praveen Kumar Maheshwari, Hindalco Industries Limited - CFO & Whole Time Director [32]

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Consol elimination is typically only between Hindalco and Utkal, which already just done when you look at the Hindalco plus Utkal numbers. With Novelis, what happens is the Novelis numbers in U.S. dollars that you have seen in Novelis results, they are as per the U.S. GAAP. And that is an adjusted EBITDA that we talk about. When they -- when their numbers are consolidated, whether with us, 2 things happen. One is the U.S. GAAP is converted into the Ind AS, which is more an IFRS standard. So this has certain adjustments. And second is the rupee-dollar exchange rate can sometimes make some differences in terms of conversion. One quarter, let's say, the exchange rate is different than -- compared to the other. That will get reflected in the rupees crores numbers. So that is why you may not be able to exactly match up to the last crore in terms of total numbers.

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Operator [33]

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The next question is from the line of Bhavin Chheda from Enam Holdings.

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Bhavin Chheda, Enam Holdings Pvt. Ltd - Analyst [34]

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So couple of questions. What's the CapEx target for this year? And how much would be the debt repayment? Second is what was the LME premium you earned this quarter vis-à-vis the last quarter and last Q4 and Q1 of last year? And third one is what are the pending things for Aleris? And what are the important dates we should track for the deal to go through?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [35]

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Okay. So let me see the first question here was on...

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Bhavin Chheda, Enam Holdings Pvt. Ltd - Analyst [36]

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CapEx and debt repayment.

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [37]

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CapEx. So via the -- on the -- you want the CapEx for the Hindalco business or the Novelis business?

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Bhavin Chheda, Enam Holdings Pvt. Ltd - Analyst [38]

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Total consolidated. And if you can give break up, it's also fine.

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [39]

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Okay. So I'll let Steve give the Novelis CapEx first, and then I'll add the Hindalco. So Steve, go ahead.

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Steven R. Fisher, Hindalco Industries Limited - CEO & President of Novelis Inc. [40]

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Yes. Satish, the total CapEx projection for Novelis for this fiscal year is at approximately $700 million.

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [41]

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Yes. So that is the strat CapEx combined with the maintenance CapEx. And for Hindalco, it's -- our CapEx plans were INR 2,600 crores, of which the sustenance was around INR 1,000 crores and the go-to was around INR 1,600 crores. Now the INR 1,600 crores strat CapEx may actually end up lower because, as we are going through the downstream expansion projects we talked about, trying to finalize land, et cetera, the cash out may not come to that INR 1,600 crores. So I think in India, we'll be more like the INR 2,000 crores to INR 2,200 crores this year is my current LE. So that's the CapEx.

Debt repayment, we don't have any plans this year. I think with the LME at this level, we will concentrate on generating cash and keeping our CapEx plans going so that we don't have any plans to repay debt this year.

So that was question 1. Then your question 2 was, I think, on premiums.

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Bhavin Chheda, Enam Holdings Pvt. Ltd - Analyst [42]

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Yes. Yes.

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [43]

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So look, domestic premiums -- and so about 50% or more of us is exported. So we get the MJP premium for that. Domestic premium actually is based on the domestic prices. And I -- we have been getting more or less the premiums that -- by the way, I don't think there's a much difference between the premium of Q4 and Q1. Put it that way.

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Bhavin Chheda, Enam Holdings Pvt. Ltd - Analyst [44]

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Yes. What was that number?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [45]

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The -- domestically, I've been getting 85 in Q4 FY '19, and we got 97 in Q1 FY '20.

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Bhavin Chheda, Enam Holdings Pvt. Ltd - Analyst [46]

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Okay. Aleris pending, what happened?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [47]

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So Aleris, I think, as Steve has already said on his call on Tuesday, we are working with the European Union and the U.S. antitrust authorities, and we are confident that we will be able to close all pending issues by Q3 of this year.

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Operator [48]

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The next question is from the line of Sumangal Nevatia from Kotak Securities.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [49]

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The first question is with respect to CC rod volumes. Now despite commissioning last year, I mean the ramp-up is very slow. So is that also was affected because of shutdowns? And secondly, you said a few operational issues also apart from the planned shutdown, which has impacted the volumes. So is there anything else we should know about that?

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Praveen Kumar Maheshwari, Hindalco Industries Limited - CFO & Whole Time Director [50]

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Well, as far as CC rods are concerned, I think the ramp-up is going fine. Last quarter, we also had a shutdown in CC rod because we had to upgrade a few things, and now it's back to normalcy. So going forward, I don't see any issues. In terms of last quarter's operational issues, we faced some issues on the fertilizer side. So the remark was more with respect to the fertilizer plant, which we are in the process of fixing. Hello?

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Operator [51]

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Sir, can you please unmute your line and confirm if you can hear us? The current participant has moved out of the queue.

We move to the next question from the line of Vikash Singh from PhillipCapital.

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Vikash Singh, PhillipCapital (India) Pvt. Ltd., Research Division - VP of Metals & Mining [52]

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Sir, I just want to understand, with the monsoon kicking in, how is our coal situation right now and what kind of cost reductions are you expecting this quarter?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [53]

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So as I said I think earlier -- to an earlier question, we actually have got probably some of the best levels of coal inventory we have seen going into the monsoon. So we have no shortage of coal in any of our plants. Q1, we saw a 3% reduction versus Q4. I would -- because of the monsoon comes, I would say that I -- the costs should be Q2 to Q1 flattish, though if input costs go down further with oil prices going down, we may see an impact. But I think, conservatively, I'm assuming prices in Q2 to be flat with Q1.

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Vikash Singh, PhillipCapital (India) Pvt. Ltd., Research Division - VP of Metals & Mining [54]

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And sir, in that sense of Muri, how much of the quantity we are purchasing from outside and what was the production for Utkal for this quarter?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [55]

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Yes, I think Utkal's production, I think we gave a total of -- how much?

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Unidentified Company Representative, [56]

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427.

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [57]

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4?

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Unidentified Company Representative, [58]

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27.

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [59]

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427 Kt was what Utkal produced. So that was slightly higher than normally Utkal does. But we bought 55 Kt in Q1. We ordered early in Q2 another 60 Kt. So we have bought about 105 from the market. I think the advantage right now is that the alumina prices worldwide have also come down to around the 300 level, so which is why I think that, in Q2, you will not see from a price impact any Muri impact anymore.

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Operator [60]

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The next question is from the line of Ashish Kejriwal from IDFC.

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Ashish Kejriwal, IDFC Securities Limited, Research Division - Research Analyst [61]

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Sir, you mentioned that still we are exporting 50% of our products, despite the fact that in India we have seen demand growing by 7% to 10%. So what could be the possible reason for the same? Is it because scraps are coming at a lower price, and we are unable to compete with that?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [62]

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So yes, I mean I think that 59% of the imports that come in, a large part of that, more than half of it is scrap. Scrap comes at a big discount to the LME. So that is one big reason. And the second big reason is we have seen a big surge of imports from China. China, by the way, in H1 of 2019 has already imported 3 million tons of FRP. So that's a run rate of 6 million tons on their normal production of 36. So as the Chinese demand has slowed down, they have started to very aggressively import metals. So I think these are the 2 things that are causing us the problems that we have in the Indian market.

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Ashish Kejriwal, IDFC Securities Limited, Research Division - Research Analyst [63]

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So sir, in case of value-added products and on a quarterly basis, we are seeing a slowdown over there. So this is mainly because of consumption demand slowdown? Or it's mainly imports are taking share of it? Like, for example, we sold 77 Kt versus 83 Kt in the fourth quarter?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [64]

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No. So normally, you should look at it Q-on-Q as well because the last quarter of the year we actually really tried to sell a lot and bring inventories down. So the Q1 sales level was actually more or less at the same level of Q1 of next year. So actually, our FRP demand we have seen no slow of demand in Q1.

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Operator [65]

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The next question is from the line of Dhruv Mucchal from Motilal Oswal Securities.

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Dhruv Muchhal, Motilal Oswal Securities Limited, Research Division - Research Analyst [66]

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Sir, some basic understanding on the currency hedge, when you say 31%, does it mean that 31% of our revenues, aluminum business, is hedged back to INR 85?

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Praveen Kumar Maheshwari, Hindalco Industries Limited - CFO & Whole Time Director [67]

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Yes, that's right. The exposure is hedged 31%.

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Dhruv Muchhal, Motilal Oswal Securities Limited, Research Division - Research Analyst [68]

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Okay. Okay. And this is equally across the quarter?

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Praveen Kumar Maheshwari, Hindalco Industries Limited - CFO & Whole Time Director [69]

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More or less, yes.

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Operator [70]

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The next question is from the line of Kamlesh Bagmar from Prabhudas Lilladher.

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Kamlesh Bagmar, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [71]

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Just one question on the part of the cost. So when you talk that the cost would be flat quarter-on-quarter, is it on the coal cost or on the COP side?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [72]

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Actually, the coal costs could go down slightly, though I'm a bit careful because we are in the sort of middle of the thickest monsoon now. So when I meant flat, I was talking about the total COP of the aluminum.

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Kamlesh Bagmar, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [73]

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Okay. But sir, as you had talked about this CPP (inaudible) and apart from that [crude] variance, another crude variance as well, coal as well. So like going forward like in Q3, Q4, how much reduction can we see? And the caustic soda operators also come down in the contract. So in Q3, what run rate can we look at from the current (inaudible)...

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [74]

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That's a good question. I would assume that we should see at least another 3% to 5% reduction in Q3 and Q4 if the input prices go down.

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Kamlesh Bagmar, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [75]

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From the Q1 deals?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [76]

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Yes.

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Operator [77]

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The next question is a follow-up from the line of Rajesh Lachhani from HSBC.

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Rajesh V. Lachhani, HSBC, Research Division - Analyst [78]

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So my question is on Aleris. So sir, the media articles suggest that you might block if we don't give them concessions. So I just wanted to know your thoughts to that whether this deal can go ahead with or without concessions.

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [79]

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So as we said, I think we have already replied that we are working with the European Union, and we are confident that we will close the deal in Q2 or 3 of this year. I think this is all I can say at this point.

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Rajesh V. Lachhani, HSBC, Research Division - Analyst [80]

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Yes. But are we willing to give some concessions as well in order to close the deal?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [81]

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Rajesh, we are working with the European Union to try to close the deal in Q3.

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Operator [82]

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The next question is from the line of Sumangal Nevatia from Kotak Securities.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [83]

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Sorry I got disconnected. So second question is with respect to the hedging strategy. Now you've shared our current hedge positions. But at LME, [sub] $1,800, I mean, will we continue to hedge, say, 15%, 20% of overall volumes?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [84]

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No.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [85]

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Sorry?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [86]

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No. I don't think, at this level, we will hedge anymore. We have taken a view when we will wait for the -- there was a, I think, a week when LME went about $1,850, $1,860. That gave us a very good forward contango. And then we caught a few percentage for next year. So we have certain levels. But to answer your question, at current levels, do we plan to hedge? No.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [87]

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Okay. So next year, I mean, if in case these prices stay where it is, I mean overall cohesion would be might -- much lower.

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [88]

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Yes. I think we have about, what, 2%, 3% already hedged for next year. So yes. But the way this thing works is that we take approved levels and we try to catch spikes when they come in the market. So at certain events, at certain things, it can suddenly spike, and then we try to catch it. That's what we did about a month or so ago.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [89]

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Understood. Okay. Sir, one question with respect to the dynamics for our captive coal cost versus import. So at what level does import make more sense? And is there any penalty or any liability we face if we produce less from our captive mines?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [90]

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No. Actually, to take your last question first, we got this mine schedule won in the first auction, so we had to meet what they call the peak production only in the first year. So we have met that. From second year onwards, we can ramp it up and down, which I've, I think, explained in earlier calls as an insurance policy. And without getting into details of every coal mine, at current prices, the imported, which is I think around $60 to $65, the imported is cheaper than the Gare Palma 4x4 and 4x5.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [91]

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Okay. All right. Understood. So if I may just squeeze in one more question. Sir, value-added products for aluminum, I mean we've been talking about investing $1 billion and focusing more and increasing VAV, but since many years, it's been in the range of 250 to 300 Kt. So what exactly are the issues we are facing here? And why are we not able to increase value-added volumes?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [92]

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Yes. To be fair, we did say a few years ago, I think I started to say that about from last year. So there are 2 things that we are doing. As I said, the first thing is the existing 300 Kt, we are trying to move it up the value chain. So we are investing in quite a lot of upgradation of our mills and technology to get the quality of the existing 300 up. And I think that from the coming quarters, we'll probably start to share with you because it's starting to contribute to our EBITDA as we go up the value chain. So that's the first part.

The second part will be the greenfield expansion, which is the Gujarat extrusion part and the Hirakud expansion. So on the Gujarat extrusion part, what took us time is we tried to get that largest piece of land near Mundra, which we have to finalize. So we now have got that and we're focused on land acquisition. So the greenfield part, unfortunately, will take time. The existing brownfield part, which is upgrading the quality, in some places the capacity, you will start to see the volumes steadily, I think, from sort of second half of this year start to go up.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [93]

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Okay. And sir, we also had an MOU with the recent government for FRP unit at Sambalpur. So what is the status of that? That also comes in the greenfield, right?

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [94]

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That sort of is a greenfield/brownfield. So the first part of that will be an additional cost-out in Aditya, which we have already started working on. We have put in an alloy ingot facility, which will come up by December of this year. So that MOU has got multiple pieces around it. So those -- the downstream part, unlike upstream, happens in modules. So you will start to see small pieces coming in. So that we have already started work on.

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Operator [95]

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The next question is from the line of Amit Dixit from Edelweiss.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [96]

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It is with respect to Novelis. This time around, we saw that EBITDA per ton, particularly in North American operations, was quite high and commentary of -- the commentary of various players, which is that it is due to increase ABS shipments. As well as I feel that the beverage can market is also kind of constrained, so therefore, we are getting advantage from that. Just wanted to understand how sustainable is this particular EBITDA number of $582 per ton? And what is the outlook going forward? Because in auto, we are seeing slowdown. And beverage can market, if you can give some color on that, that would be great.

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [97]

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Steve, do you want to take the question?

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Steven R. Fisher, Hindalco Industries Limited - CEO & President of Novelis Inc. [98]

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Yes. That -- so as we talked about a little bit earlier in the week, North America had a very strong quarter, and a lot of that has to do with the dynamics that you just mentioned, a very strong auto market in North America, strong beverage can market in North America, strong specialty market in North America and some benefit from inter-regional shipments coming into North America as well from other regions that we spoke about. So overall, from a sustainability standpoint, if you go back and just look at our consolidated EBITDA per ton over the last 12 months, it's $425 per ton. And we do think that is a sustainable -- under the current market conditions, we do think that's a sustainable level that you should be thinking about for Novelis.

As it relates to the specific end markets, auto, I'll start with first. Again, we see continued strength in the U.S. market, even with the overall build rates coming down on a year-over-year basis. Where you see more aluminum in certain vehicles are in trucks and SUVs, larger vehicles, luxury vehicles, and those markets continue to stay very strong, if not, having some growth on a year-over-year basis. So we feel good about the overall U.S. auto market for the near future here.

We also feel good about the European market. We do have a little bit overweight exposure to a single auto producer in that marketplace in the U.K. that's given us a bit of headwind from what they're seeing in their overall sales. But overall, the general conditions in Europe, we feel good about the continued penetration of aluminum and continued overall European auto market.

And then the one spot weakness is in China, where, as Satish has mentioned, the global or the U.S.-China trade war has caused some consumer confidence erosion and we've seen overall vehicle sales decline on a year-over-year basis. With that said, in the medium term, we do see that as a growth area for us as continued significant -- as the auto build rates pick up and then electric vehicles pick up in that market as well from [immunization].

From a beverage can standpoint, we see a lot of strength right now, growth driven by mix shift dynamics, good economic conditions in a number of parts of the world and also a sustainability trend away from other substrates towards aluminum that we're receiving benefit for and we see that market continuing with some strength over the next several quarters.

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Operator [99]

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The next question is from the line of Kamlesh Bagmar from Prabhudas Lilladher.

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Kamlesh Bagmar, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [100]

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Yes, it's answered.

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Operator [101]

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Mr. Bagmar, can you speak a little closer to the phone. We are unable to hear you.

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Kamlesh Bagmar, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [102]

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I'm saying that it's answered.

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Operator [103]

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Ladies and gentlemen, this was the last question for today. I now hand the conference over to the management for their closing comments. Over to you, sir.

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Satish Pai, Hindalco Industries Limited - MD & Executive Director [104]

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Yes. Thank you for your attention. I think this quarter, with the consolidated results that we have published, it shows the resilience of the diversified model we have, which is a mix of the upstream and downstream business and I think that in the tough LME times, our business model is going to help us outperform our competition.

So thank you very much for your attention.

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Operator [105]

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Thank you very much, members of the management. Ladies and gentlemen, on behalf of Hindalco Industries Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.