Hindalco is the flagship company of the Aditya Birla group. The company commenced operations in 1962 with an aluminum facility at Renukoot in Uttar Pradesh. Over the years, it has grown to become the largest integrated aluminium manufacturer in India, with a capacity to produce 514,000 tonnes per annum (tpa) of aluminum and 1.5 million tpa of alumina. The company is also a custom smelter in the copper business. In 2007-08, Hindalco reported a net profit of Rs.28.61 billion (Rs.25.64 billion in 2006-07) on net sales of Rs.192.01 billion (Rs.183.13 billion). In the first nine months of 2008-09, Hindalco reported a net profit of Rs.19.62 billion on net sales of Rs.144.48 billion
Hindalco, the metals flagship company of the Aditya Birla Group, a $29 billion corporation, is one of the world's top five aluminum majors worldwide having a global footprint in 12 countries that encompass the entire gamut of operations, from bauxite mining, alumina refining and aluminum smelting to downstream rolling, extrusions, foils, along with captive power plants and coal mines.
LANDMARK CORPORATE RESTRUCTURING OF HINDALCO AND INDO GULF TO CREATE NON FERROUS METAL POWERHOUSE AND AN INDIAN CORPORATE GIANT
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Indo Gulf to merge copper business with Hindalco Fertiliser business of Indo Gulf to be demerged into a separate company to be named Indo Gulf Fertilisers 1 equity share of Hindalco for 12 equity shares of Indo Gulf and 1 equity shares of the fertiliser company for 5 equity shares of Indo Gulf to be issued to Indo Gulf shareholders
Attractively priced open offer for Indal shares at Rs. 120 by Hindalco at premium of 36% to 26 Week Average (SEBI Statutory Price) with aim to attain 100% shareholding in INDAL
EPS accretion of approximately 7-10% in the short term and 15-20% in the medium term for Hindalco shareholders
Premium over market price for Indo Gulf shareholders
Transaction expected to be value enhancing for shareholders of all three companies CRISIL has downgraded its rating on Hindalco Industries Ltd's (Hindalco's) long-term debt to 'AA-/Negative' from 'AA/Stable'. The rating on the short-term debt facilities has been reaffirmed at 'P1+'. The rating downgrade and outlook revision on the long-term rating are a consequence of CRISIL's re-assessment of its ratings on non-ferrous metal producers, in the light of weak metal prices and demand globally
The rating downgrade and outlook revision reflect CRISIL's expectation that weak aluminium prices will keep Hindalco's earnings under pressure over the medium term; the aluminium business accounts for three-quarters of Hindalco's profits. The decline in accruals, coupled with large planned capital expenditure (capex), will also keep the company's gearing high. Moreover, Hindalco is unlikely to realise the expected returns on its investment in Novelis Inc (Novelis) over the medium term, given the severe business downturn that Novelis faces.
Business Risk to the Hindalco:-
Cyclical industry constrains business risk profile: Hindalco's business risk profile is, however, constrained by its exposure to highly cyclical end-user segments. Further, the aluminium industry is exposed to volatility in prices on the benchmark London Metal Exchange (LME). Hindalco's operating strengths, its low cost of production and presence in value-added products, however, mitigate this risk to a large extent.
In the past, the company faced a slight alumina deficiency with the shortfall being met by its tolling arrangement with Indal. With its ongoing capacity expansion programme, however, Hindalco would soon be self-sufficient in alumina and hence, have improved raw material linkages. The completion of the ongoing capacity expansion programme is also expected to further enhance Hindalco's cost competitiveness due to lower per unit fixed costs.
Strong financial position: Hindalco's business strengths are reflected in its strong financial position. Its low-cost structure results in high profit margins. Further, the company has a favourable capital structure with a gearing of 0.21 as on March 31, 2002. It also has a large treasury of liquid investments, resulting in zero net debt. Its high profit margins coupled with low debt levels result in its debt protection measures being extremely strong (interest cover of about 26 times and cash accruals in relation to debt of about 84 per cent for FY2002).
Effects on financial Position:-
Merger of Indo Gulf's copper business to marginally impact Hindalco's key financial indicators: Post merger, Hindalco is expected to maintain its strong financial position, although the merger of Indo Gulf's copper business would result in a decline in its key financial indicators.
The company's consolidated gearing would increase from present levels due to the additional debt of the copper business of around Rs 10 billion.
Overall profit margins are expected to decline as the relatively less profitable copper business (operating margins of less than 20 per cent as against margins of more than 40 per cent in aluminium) would account for a significant proportion of the company's sales in future. The copper business will account for around 40 per cent of the consolidated entity's total sales.
Consequently, interest and debt coverage ratios would also decline. The financial risk profile would, however, still be consistent with the 'AAA' rating category. On the business side, in Crisil's opinion, while the addition of the copper business will enhance Hindalco's business diversity, the benefits arising out of this diversity would be limited given the correlation that exists between the LME prices of copper and aluminium.
Hindalco Startegy: Dealing with the Downturn
Challenges Action
Cost Push Sweating of assets, Focus on key Raw Material
Low LME Better Product and Geographical Mix
Cash Generation Working Capital Reduction
Volatility Robust Risk Management Practice and early Adoption of AS 30
Hindalco emerged relatively stronger from the economic downturn.
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Post effects of application of risk management techniques
Brownfield expansion and sweating of assets led to improved production volume
Continuous improvement in operational performance
Improved efficiency leading to lower conversion costs
Value extraction from By-products
Gypsum Sale
Slag beneficiation Helped in Offsetting the negative impact of sharp fall in Byproduct prices
Positive about coming out of the downturn with targeted growth trajectory unchanged.
