How Satish Pai charted Hindalco's path to long-term growth in aluminium and copper sectors

Like many engineers before him, Satish Pai headed for foreign shores after picking up a degree in mechanical engineering in 1985 from IIT Madras. For 28 years, he worked for the US-based oilfield services company Schlumberger.

In 2013, he returned to the country of his birth to take charge of Hindalco’s aluminium business. Working for the Aditya Birla Group, a diversified $65-billion conglomerate, promised to be an interesting experience. And surely, it hasn’t disappointed him, since Pai, Managing Director of Hindalco Industries, has had to navigate the company through many twists and turns across markets. He is looking to position the company as a downstream value-added player, even as it looks to ramp up its play in copper.

But Pai, winner in the Super Large Companies category of the BT-PwC India’s Best CEOs ranking this year, walked into a major crisis in India. In 2014, the Supreme Court cancelled the allocation of coal blocks to public and private enterprises in light of the coal scam. It was a hugely challenging time.

“Till then, we worked on a model where input costs were zero, and it helped us make a substantial amount of money,” says 62-year-old Pai. A changed scenario meant paying the market price. “Indian manufacturing needed to face global competitive standards and had to get very efficient.”

Putting on his thinking cap, Pai looked for India’s big advantage. Brain power stood out and so he pushed hard on downstream—engineering products and solutions—and eventually led to a thrust on value-added products. “Today, Hindalco products are a lot more visible in buses and aircraft, and we did not realise how much of an impact downstream would have,” explains Pai.

To Pai, coming up with a strategy is not a eureka moment but a response to the environment. “The coal block issue was a shock, and Hindalco’s shares were down to Rs 70 (it is around Rs 570 now), but we needed to make things work. Since then, revenue, Ebitda, and our share price have all taken off.” Maintaining that it is a very resilient company, he says with half a smile that “only the paranoid survive”. Meanwhile, net debt to Ebitda (the ability to repay debt assuming net debt and Ebitda don’t change) is down from seven times to zero. “In every way, the 2013–14 crisis taught us a lot,” he says. Today, he runs a strong ship that is embarking on a rather interesting journey. “We will be sitting down for a strategy session [soon],” says Pai. The move to position the company as a downstream value-added player will take time, but it is one that must be done, he says. As the world changes, so will Hindalco’s core aluminium business, and there is a huge opportunity to stand out. Pai clearly does not want to let that one pass.

The desire to position Hindalco as a downstream player is part of the larger game plan. “Upstream (mining and refining) is important, but growth and differentiation bring us closer to the consumer,” he says.

The acquisition of Novelis in 2007—it recently filed documents for a proposed initial public offering in the US—for $6 billion gave Hindalco access to the can and beverage and automobile markets. The next step was to develop the Indian downstream business. Another component of the strategy has been to make manufacturing more interesting and appealing. “Our attempt is to take the brawn out and put more brain into analytical activity. For instance, modern smelters have nothing lifted physically but are around analysing data.” Three areas really define Hindalco’s strategy—the downstream market, people, and digital.

With his earlier employer, Pai was quick to learn how critical people were. He picks out Jim Collins’s best-seller from 2001, Good to Great, to elaborate on this point. “It is based on a simple premise that if you get the right people on the bus, it will go to the right place,” he says.

Recalling his initial days at Hindalco, Pai says something as basic as a daily report would first go to someone from the plant before he saw it. “Digital was not very important, and the first step was processes and standardisation. Traditional manufacturing was hierarchical, and digital today has flattened the organisation with information coming live.” It also meant the skillset requirements had changed. In the past, a person straight out of school could do paperwork, but those jobs don’t exist anymore, with at least a diploma in engineering being a must today. There is also a focus on making the firm inclusive, and that starts at the base of the pyramid, with 40% of the workforce being women.

All these changes seem well timed. Most people in manufacturing are convinced that this is India’s moment. Of course, it has been a long road—in aluminium, India started smelting in the 1950s, while China got on to it in the 1990s, and today it produces half of the global volumes. “Just imagine; we buy technology from them,” says Pai in utter disbelief.

On the downstream strategy, Aditya Welekar, Senior Research Analyst at financial solutions firm Axis Securities, says it derisks Hindalco from volatile global aluminium prices. According to a Hindalco investor presentation, the firm expects domestic consumption to double from 4.5 million tonnes in FY23 to 9 million tonnes in FY33. “Building and construction, packaging, lightweight, and EVs in auto and electrical applications provide tailwinds for that. A scenario of fewer integrated aluminium producers and Hindalco’s presence in both integrated upstream and downstream supply chains, coupled with a first-mover advantage, is a clear runway to capture the downstream market,” says Welekar.

On manufacturing globally, the buyout of rolled products maker Aleris (in April 2020 for $2.8 billion) was strategic, but there was also a need to divest two large plants in line with anti-trust regulatory conditions. Consequently, only organic expansion is possible in the US. In the domestic market, the investment will be in extrusion, rolled products and expanding alumina upstream. “The time is right to invest in India with battery foils, electric buses or your mobile phone. Everything you touch today has aluminium or copper.”

The business is not just aluminium and what is not widely known is that copper is equally large for the company. And the way things are starting to move, the latter is at a stage where sharp growth is more than likely.

“We manufacture copper tubes for air conditioners and also a copper magnesium alloy for high-speed railway lines. Copper is quite an underrated business, and it consistently does an Ebitda of Rs 2,000 crore,” points out Pai. The hitch is it is environmentally complex—it meant the plant in Dahej took four years—and one has to be top-notch on the requirements.

Speaking of complexity, the manufacturing process for copper is three to four times more complex than that for aluminium in terms of ensuring purity and quality. “Your home has electric wires where quality is key. The next step is branding copper,” says Pai. That means working on a product-branding strategy under Hindalco. An obvious opportunity is electrification, and that inevitably will lead to an increase in copper production. “There is no factory today in India for making copper tubes that go into the air conditioners,” he says. Though there is a production-linked incentive scheme for the finished product, like air conditioners, there is no such scheme for the parts that go into it.

Sanjay Moorjani, Research Analyst at brokerage Samco Securities, estimates that about three-fourths of the total copper use goes into power transmission and generation, building, wiring, telecommunications, and electrical and electronic products. “In the next 10 years, global copper consumption is expected to double. Copper products play an important role in expanding markets such as electric vehicles and renewable power, where exceptional electrical conductivity is essential.”

Hindalco has made some moves on this front, like acquiring copper wire rod manufacturer Ryker Base, a wholly-owned subsidiary of Polycab India, which has a plant in Gujarat. “The buyout places Hindalco among the world’s top three copper rod players outside of China,” says Moorjani. Another initiative is the plan to invest Rs 2,000 crore to establish a copper and e-waste recycling facility.

In terms of challenges, Pai outlines green energy. “We need a steady source of power. In France, it is nuclear, and in Norway, it is hydroelectric,” he says. The downstream operation requires much less power than smelting. “In the West, most of the smelters have shut down. The Middle East has nuclear plants like China and Germany, and we must look at that option in India.” It is a challenge that needs to be addressed, given the thrust on sustainability across the world.

The next round of growth for Hindalco will have no paucity of opportunities and challenges. It promises to be a busy time for Pai.

 

@krishnagopalan