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Indal buyout will spur consolidation in the Indian aluminium industry... - Views on News from Equitymaster
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  • Apr 10, 2000

    Indal buyout will spur consolidation in the Indian aluminium industry...

    Having joined Hindalco in 1967, Mr. R K Kasliwal has grown with the company to become its Executive President (Finance and Commerce) and Chief Financial Officer. Mr. Kasliwal, who is a fellow member of the Institute of Chartered Accountants of India, is also a member of the Core Management Team of Hindalco.

    In an interview to equitymaster, Mr. Kasliwal, Executive President (Finance and Commerce) and Chief Financial Officer, Hindalco, took time off from his busy schedule to talk to about the recent acquisition of Indian Aluminium (INDAL) and the demand and price trend in the domestic sector.

    EQM: Hindalco's acquisition of a majority stake in Indal has spurred the process of consolidation in the domestic aluminium sector. What were the prime objectives behind bidding for the stake in Indal? How does the company plan to finance the buyout?

    Mr. Kasliwal: Yes, we do believe that the Indal buyout will spur consolidation in the Indian aluminium industry. Consolidation is inevitable if industry is to compete in the coming years. Our prime objective in the Indal acquisition was to capitalise on the strengths that both Hindalco and Indal posses. We are strong in metal and marginally short in alumina. Indal is alumina surplus, short in metal and has considerable strengths in semi-fabrication. Our strong presence in metal coupled with Indal's strengths in semi-fabrication offer a good fit. We see ourselves capitalising on this fit so as to grow the aluminium business in India to the benefit of our shareholders. We have adequate liquidity to fund this acquisition. As a matter of fact, deployment of surplus cash available with us in the acquisition will ensure improved return on capital employed (ROCE).

    EQM: The accident at Kaiser (USA) came as a boon for the aluminium sector. How do you see the price scenario developing from here?

    Mr. Kasliwal: The alumina shortages that began with the accident at Gramercy and were aggravated with problems in Australia undoubtedly played a role in pushing up alumina prices which in turn pushed up aluminium prices. Work is progressing well on Kaiser's Gramercy Plant and production is expected to resume a little after mid 2000. However, the story of rising aluminium prices had more to it than an increase in alumina prices. It was also supported by good fundamentals - a strong USA, improving Europe and above all distinctly better Asia. Normalcy of output at Gramercy and the expansion of Australian facilities will be fully absorbed by additions to smelting. Therefore, even though alumina prices may come off the highs of today, they will continue to be firm and will support the fundamental driven aluminium consumption growth that industry expects to continue.

    EQM: The per capita consumption of aluminium in India continues to be a fraction of that in developed countries. How do you see the demand situation developing in the coming years?

    Mr. Kasliwal: We view the low per capita consumption in India as an indication of the opportunity that exists for increased aluminium consumption. We have to remember that it is merely a decade since industry was freed of stringent controls on distribution and pricing. Whereas controls on distribution restricted development of new end uses, controls on pricing restricted the ability of industry to fund expansion and growth. The rapid progress indigenous industry has made over the preceding years is extremely promising - and we remain very positive about the prospects for increased per capita aluminium consumption in the coming years.

    EQM: The company has decided to pursue a brown field expansion plan as against a green field unit. What led the company to this decision? Please expand on the scope of operations of the new plant.

    Mr. Kasliwal: We decided to shelve the proposal for a greenfield aluminium complex in Orissa because it did not offer enhanced shareholder value. On the other hand, a brown field expansion of our facilities at Renukoot does promise enhanced shareholder value, which is why we have decided to go ahead with it. The brown field plans include increase in smelting capacity by MTPA, increase in alumina refining capacity by 220,000 MTPA and required augmentation of our captive power generation facilities.

    EQM: How does the company plan to fund this expansion?

    Mr. Kasliwal: Funding for the brownfield expansion will be through internal accruals and debt we do not plan any dilution of Equity.

    EQM: How will the budget impact the prospects of the domestic aluminium sector?

    Mr. Kasliwal: The aluminium industry in India is a significant exporter. Therefore we are extremely concerned about the proposal to gradually withdraw the benefit of Income Tax exemption under Section 80 HHC. Like other corporates, we are also unhappy about the doubling of rate of Dividend Tax. These are the two major issues, which we are concerned about since they will have a tangible adverse financial impact.

    EQM: In India, the aluminium prices are at a discount to the landed price of imports. Will the discount continue and what is your view on the import tariffs?

    Mr. Kasliwal: See, so far as the import tariffs are concerned, right now the import tariffs are high at an effective level of 33%. But we internally are positioning ourselves for a position in which tariffs are as low as 5% to 10%. So far as aluminium is concerned, the Raja Chelliah committee has recommended a threshold duty rate of 15%. What I believe is that even when duties are reduced to recommended levels or to even 5-10%, even then there will be some premium to the international prices if the metal is imported in India. I believe that this premium will be around 12.5%. Right now domestic metal trades at a discount of Rs 12,000 as compared to imported metal. This is because we have stabilised pricing policy in India where we review our prices from time to time and in a three-month time frame if the prices are sustained, we effect a change in price. You have to take into consideration what other producers are doing since we have to compete. Keeping that in mind the prices are being determined in the market.

    EQM: What are the provisions regarding the aluminium sector in the WTO agreement and when do they become applicable. How do you think these provisions will affect the domestic sector?

    Mr. Kasliwal: We do not see any specific provisions for the aluminium sector under the WTO conditions. As with other industries we expect a lowering of import duty on our saleable products. We also expect a similar reduction of duty on capital goods and inputs. We are apprehensive of a withdrawal of export incentives - we have the recent announcement of a gradual withdrawal of benefit under Section 80 HHC. What we do believe is that the government must ensure the existence of WTO compatible support to exporters before dismantling the existing structure, which provides support to the country's export effort.

    EQM: In coming years where do you see Hindalco placed in the global scenario.

    Mr. Kasliwal: Hindalco will consolidate its position as a global player in the coming years. Following our brown-field expansion we will have a metal capacity of 342,000 MTPA and alumina capacity of 666,000 MTPA. Our current capacity of Rolled Products is 80,000 MTPA. Besides this Indal has an effective metal capacity of 45,000 MTPA, alumina capacity of 372,000 MTPA and rolled product capacity of 90,000 MTPA. Taken together, we will be market leaders in most of the segments viz. metal, rolled products, extrusions and foils. We see ourselves improving considerably in terms of cost and quality as we synergise the strengths of Hindalco and Indal. Consequently, we are very excited about our future.

    EQM: What separate issues are being addressed to enhance shareholder value in the next 2 years?

    Mr. Kasliwal: Our objective is to deliver outstanding value to shareholders on sustained basis. We have a 3 pronged strategy for doing so

    • First and foremost is to sustain our global competitiveness. Our success in remaining one of the lowest cost producers in the world can be attributed in a large part to our strategy of ensuring controls on key inputs and a continuos drive for improving on technological benchmarks. We intend to continue our pursuit of this strategy.

    • The second facet of our strategy is to continue our efforts for effectiveness in the market place. This is being done by emphasis on more and more of value added products. We are repositioning ourselves - from purely a metal supplier to a service and solution provider to customers.

    • The last leg of the strategy is to focus on growth which is value creating. The Brown field expansion and recent acquisition of Indal clearly spells our pursuit of shareholder value creation.

    • We believe the fundamental value creation alone can sustain competitive advantage. We are rolling out an aggressive value management program - 'Project Together' - an exercise currently on across all the Aditya Birla Group Companies - an exercise that targets enhanced shareholder value. The exercise requires us to identify value drivers and work aggressively to promote value-adding measures. We are going through this exercise of identifying opportunities for cost cutting and means of enhancing realisation. These exercise involve the entire gamut of activities which includes product rationalisation, optimisation of product mix, improvement in productivity and improved logistics. As I have mentioned above, the Indal acquisition will contribute to this drive for enhancing shareholder value.

    EQM: Who are the 3 people that you admire the most?

    Mr. Kasliwal: The 3 people that I admire the most:

    • Pt. Jawaharlal Nehru, whom I regard as the maker of modern India.
    • Shri Aditya V Birla, my late Chairman who had a vision far beyond his times.
    • Shri Dhirubhai Ambani, for his phenomenal success and his role in promoting the capital markets in India.

    EQM: What are your favourite books?

    Mr. Kasliwal: Of late, I get very little time for serious reading - but I do like to read. My favorites are biographies, and autobiographies of successful people and books that encourage positive thinking. I also like books on management practices.



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