The logical culmination of the Sterlite – ALCAN tussle over control of Indian Aluminium (Indal) has been reached. In an all cash deal, Hindalco Limited has purchased a 54.6% stake in Indal from ALCAN. Post this acquisition, Hindalco has also stated that it would be making an open offer for an additional 20% stake in Indal. The acquisition of the 74.6% stake is likely to cost Rs 10 bn.
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.
Indian Aluminium Company (INDAL) is India's largest fabricated aluminium producer. Indal, along with its associates, is the largest producer of sheets and extrusions and the second largest producer of foils in India.
* exisiting capacities in tonnes per annum
Indal and Hindalco make good partners. While Indal is alumina surplus and focussed on downstream products, Hindalco’s output consists mainly of aluminium. Also, Hindalco outsources a part of its alumina requirements even as Indal, which is alumina surplus, enters into third party agreements to convert its alumina into metal. The synergies are apparent. The integrated company would be fully integrated from the point of manufacturing of alumina to value added products like foils.
Then there is a 20% stake in Utkal Alumina (capacity of 2.5 million tonnes) that is owned by Indal. By virtue of this, Hindalco will get a chance to participate in a venture, which has ALCAN and Norsk Hydro as the other partners.
In a commodity-based business (where usually there is intense competition) like aluminium, prices are market determined and therefore manufacturers have to control costs in order to get a grip over their profit margins. However, with very large volumes that will give it a dominating position in the market, the company would be able to influence prices to its benefit. Therefore, both the factors of synergy and pricing power are likely to benefit the two companies.
With this acquisition the company also puts at rest, at least for the time being, Sterlite Industries’ quest to become a dominating player in the market.
The only concern from this acquisition pertains to the funding – Rs 10 bn in cash. Hindalco already has committed capex of Rs 18 bn and coupled with the long-term debt that is in excess of Rs 5 bn, the company may be hard pressed for funds. Although it may seem to be a hurdle, the company’s cash and investments (Rs 11 bn as in FY99) are themselves enough to fund the investment. Infact the company has gone on record to state that it does not see a rise in the debt equity ratio. Also, Hindalco is actively seeking to list its shares on the NYSE, and once that is done the company may be able to raise further funds by issuing ADRs.
Analysts have recommended Hindalco 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.
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