Hindalco seeks RBI’s 5/25 protection

Non-ferrous metals producer Hindalco is in talks with banks to refinance around R7,000 crore of loans for two projects - Aditya Aluminium and Utkal Alumina International (UAIL) - under the Reserve Bank of India’s (RBI) 5/25 scheme, two bankers aware of the development told FE.

“Although the company’s financials are not really stressed at the moment and it has been repaying its loans on schedule, it wants to free up some liquidity by stretching loan repayments,” a banker explained, adding that the refinance has not yet been approved.

The Aditya Aluminium project comprises a R13,000-crore smelter-power plant complex at Lapanga in Sambalpur district of Odisha with a smelter capacity of 3,60,000 tonnes. The UAIL project in Rayagada district, Odisha, comprises a 1.5 million tonnes per annum alumina refinery. The alumina refinery UAIL, a 100% subsidiary of Hindalco, has been operational with trial runs having commenced, according to the company’s website.

UAIL achieved an earnings before interest, tax, depreciation and amortisation of R261 crore in FY15, Hindalco said in its investor presentation.

UAIL produced 316 kilo tonnes (kt) of alumina in Q4FY15, more than twice what it produced in the same period a year earlier.

Meanwhile, in Q4FY15 Aditya Aluminium’s production stood at 36 kt.

At Hindalco, the aluminium business accounts for more than 70% of revenues and operating income. However, spot aluminium prices on the London Metal Exchange are near a six-year low of $1,593 per tonne, having fallen from $2,786 per tonne four years ago.

Refinancing loans under the 5/25 scheme helps ease cash flows of companies since the repayments can be made over a longer time period. Experts point out that ideally long-term infrastructure projects should not be funded by banks since their liabilities are of a short-term nature and, therefore, results in an asset-liability mismatch. Funding long-term assets with shorter-term liabilities has resulted in higher initial repayments by promoters, pressuring their profits. However, ratings agency Crisil has pointed out that refinancing loans under the 5/25 scheme may mask the true picture of asset quality. It has warned that about 15% of these assets could slip into non-performing asset (NPA) territory over the longer term. They estimate Rs 80,000 crore of assets could be refinanced under the scheme this year.

“We believe that the 5/25 scheme will replace the restructuring tool earlier available to banks, especially for large loans. Restructured assets were visible in the reported numbers of banks. But now, the assets that will be part of the 5/25 scheme, they will not be necessarily be reported by banks and could get masked in the NPAs,” Crisil noted in a recent report.

Since December 2014, the RBI has allowed banks to refinance existing infrastructure projects under the 5/25 model provided the projects have commenced commercial operations.

In its FY14 annual report, Hindalco had said that all three strategic greenfield projects — UAIL, Mahan Aluminium and Aditya Aluminium — went onstream and are currently ramping up. “With the commissioning of these projects, your company’s alumina and aluminium capacity will be doubled — alumina from 1.5 million tonnes to 3 million tonnes and aluminium from 0.6 million tonnes to 1.3 million tonnes,” it said.