Following Alcan’s decision to offload its majority stake in Indian Aluminium (Indal), speculation is rife that Hindalco Limited, India’s largest private sector aluminium producer, is considering a move to bid for the stake. Hindalco has denied any such move.
Hindalco (FY99 Sales Rs 17,670 m), an Aditya Birla Group Company, is the largest (Installed capacity 242,000 MTPA) and the lowest cost producer of aluminum in the country.
The decision to pick up a stake in Indal does seem logical given the fact that core competencies of the two companies are complementary. Hindalco has been focussed in the production of aluminium metal and has ventured into downstream products only recently. Indal, on the other hand, has concentrated its efforts in the manufacture of alumina (a large part of which is converted into aluminium by entering into contracts with third party smelters) and downstream products like foils. A merger would create an entity whose operations are well integrated thus creating opportunities for exploiting synergies (for example Indal could then source its aluminium requirements from Hindalco) and scale economies.
Another implicit benefit of an alliance would be that it would curb the cutthroat competition in the down stream products market. This would result in better realisations for both the companies.
At current prices, Alcan’s stake in Indal would cost the company Rs 4.5 bn. In view of the ongoing capital expenditure of Rs 18 bn, the total funds requirement would increase dramatically. In such a scenario, Hindalco may have to go in for external funding. In case the company goes in for debt (it had long term debt of Rs 5.3 bn in FY99), its interest burden (Rs 836 m in FY99) would rise dramatically.
A merger or buyout would be in the best interests of both the companies in view of their complementary core competencies. The benefit of such a deal more than outweigh the downside, which pertain mainly to funding costs.
Analysts have recommended the stock as a 'BUY' mainly on account of the international and domestic price recovery in aluminum. Moreover, they favor the company's ability to produce aluminum at rates ($941 per ton), that are amongst the lowest in the world.
Hindalco Industries has reported a healthy growth in the topline on the back of Higher volume and realisation for both Aluminium and Copper segments. However, the bottomline declined marginally primarily on the back a provision of Rs 1.04 billion.
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