The deal to buyout Indian Aluminium now seems to be just the tip of the iceberg. Hindalco Limited, India’s largest private sector aluminium company, has laid out an aggressive plan that will see it emerging as a leader in Asia.
The company, after its planned expansion and investment, will command a capacity of 1.15 m tonnes in metal and 4.6 m tonnes in alumina. The highlights of the company's plan is as follows:
Bid for stakes in both Bharat Aluminium and National Aluminium (one of the lowest cost producer of alumina in the world) as and when they come up for disinvestment.
Pursue the Aditya Aluminium project in association with Alcoa
Join Utkal Alumina as a majority partner (Indal, its subsidiary, already has a 20% stake in the venture)
At current prices a 51% stake in Nalco would cost the company approximately Rs 15 bn. But given the fact that this would involve a change in management there would be a premium associated with the deal. The costs could thus be much higher than these levels. Coupled with its planned investments in Balco, Utkal Alumina and planned capacity expansions (estimated to be Rs 2.5 bn), the greenfield project would dramatically increase the need for funds.
Given that the company carries a negligible amount of debt on its books, funding its planned investments should not be a problem. To put this in perspective, at existing net worth levels, if the company’s debt to equity ratio were to increase from 0.1 (which is negligible) to 1 (which is regarded as comfortable) it would have in the process raised over Rs 48 bn in debt. But then there is an issue of higher interest costs, which could suppress profitability. Hindalco is currently the most profitable among the three leading aluminium companies including Indal and Nalco.
With increasing liberalization, competition in the domestic marketplace is on the rise. The company, rather than building defenses, is obviously fighting back. Given its advantages of captive raw material sources and efficient operations (Hindalco is one of the lowest cost producers of metal in the world) it definitely needs to step up its presence in domestic and international markets. The current plan must be viewed in positive light (It must however be mentioned that the last time the company announced a green field expansion the stock took a knock on the bourses).
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