Why it is difficult to accept Hindalco's claims that it has sufficient bauxite inventory

Hindalco Industries on Wednesday claimed it has sufficient inventory of bauxite to run Muri and Renukoot alumina refineries despite the recent closure of its six mines by the Jharkhand state government.

However, the fact that lack of bauxite mineral forced the company to drop its alumina production in April-June quarter gives another picture.

After dna reported on that Jharkhand government had shut five bauxite mines of Hindalco on Tuesday, the company made a disclosure on Wednesday to stock exchanges, in which it claimed, "In respect of six bauxite mines at Jharkhand the company had applied second renewal of mining lease as per stipulated time, and these mines were operating under the provision of deemed renewal. Bauxite from the said mines was supplied at Muri and Renukoot alumina refinery."

The aluminium major said, "The company expects that these renewals will be granted within a period of six months, and therefore above event will not have any adverse material impact in near future on the operation and performance of the company, as the company has sufficient inventory and other operating mines in the area which also supply bauxite to its alumina refineries at Muri and Renukoot."

However, some analysts called these claims of the company "hollow".

In the first quarter of the current fiscal, Aditya Birla Group company's alumina production excluding Utkal refinery fell to 290,000 tonne as compared with 348,000 tonne in the year-ago quarter and 318,000 tonne in January-March.

"Production was adversely impacted due to constraints posed by bauxite availability," the company had said in first quarter earnings release filed with the bourses.

"It would be good to have more disclosure from the company on bauxite sourcing. If the company had inventory in place, we find it difficult to digest that Q1 production got hampered for the want of bauxite," Ritesh Shah, materials analyst with Espirito Santo Securities, told dna.

In a report published earlier this week, Shah had pointed that the mines which are shut cumulatively accounted for 45% of Hindalco's bauxite production from Jharkhand (at 2.23 million tonne). "In addition, production at Hindalco's Maliparbat bauxite mine (Odisha) has come to halt as the district administration has imposed a prohibitory order," the report said.

Espirito Santo estimated that Aditya Birla Group company has around 2.23 mt of bauxite production in Jharkhand, of which around 1.01 mt will be impacted due to this ban. Another 0.6 mt of bauxite output will be impacted due to closure of Maliparbat mine in Odisha.

According to the company's website it has captive bauxite mines in Jharkhand, Chhattisgarh, Maharashtra and Odisha, which provide the raw material to its alumina refineries located at Belgaum in Karnataka, Muri in Jharkhand and Renukoot in Uttar Pradesh.

Most analysts were concerned about the several uncertainties currently prevailing in reference to operations of the company. The company's consolidated debt at the end of last fiscal stood at Rs 56,298 crore and debt-to-equity ratio was 0.72. In order to reduce debt, the company was planning to come up with a qualified institutional placement, however that is also likely to get delayed. India's second-largest aluminum maker is likely to postpone the share sale to institutional investors on uncertainty about its access to cheap raw materials.

Hindalco is also likely to face further stress if the Supreme Court decides to cancel Mahan coal block in which it holds 40% off-take rights. The court under an ongoing case on coal block allocation scam has reserved the verdict on cancellation blocks until September 27. Mahan Coal, which is a joint venture between Essar Power and Hindalco in Madhya Pradesh, hangs in limbo as this block has not featured on the list of 46 coal mines the government has requested the court to not cancel.