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Hindalco: Strong expansion plans
Sep 8, 2009

We recently met up with Hindalco to discuss the current business environment and various developments taking place within the company and the aluminium sector. Here are the key takeaways from our research meet. Brief background: Hindalco Industries Limited, the metals flagship company of the Aditya Birla Group, is an industry leader in aluminium and copper. A metals powerhouse with a consolidated turnover in excess of US$ 15 billion, Hindalco is the world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia. Its Copper smelter is the world's largest custom smelter at a single location. In 2007, with the acquisition of Novelis Inc. a world leader in aluminium rolling and can recycling, the company was catapulted into the league of world's top 5 aluminium producers, as an integrated producer with low cost alumina and aluminium facilities combined with high-end rolling capabilities and a global footprint in 12 countries outside India.

Expansion plans: Hindalco has lined up a massive expansion plan spanning over a period of next four years, which would take care of the company’s growth needs over a long term period. The company is undergoing expansion through both brownfield as well as greenfield projects. On the alumina front, the company is coming up with two Greenfield projects of 1.5 m tonnes capacity at Utkal and Aditya Aluminium by FY12 and FY14 respectively. This will enhance the total alumina capacity of the company to around 4.5 m tonnes annually. During the same period, Hindalco’s aluminium capacity will be increased to 1.7 m tonnes through a brownfield expansion at Hirakud and greenfield projects at Aditya Aluminium, Mahan and Jharkhand Aluminium. These projects are expected to complete between FY12 and FY14. Further, the company is also coming up with three captive power plants of 900 MW capacity each at Aditya Aluminium, Mahan and Jharkhand Aluminium. All these projects are poised to enhance the scale of operations of Hindalco and add to its competitive strength so that it continues to remain among the lowest cost producers in the world. The company plans to invest a ballpark amount of Rs210 bn over a period of four years for the above mentioned projects. In order to increase the margins of its copper business, the company plans to acquire mines, making the segment fully integrated.

Debt position: Hindalco had acquired Novelis in 2007 for around US$ 6 bn. The deal was financed through a bridge loan of US$ 3.1 bn and cash of US$ 450 m in the form of equity along with carrying a debt of US$ 2.6 on Novelis’ balance sheet. In November 2008, the company replaced the bridge loan by infusing US$ 1 bn in form of equity and US$ 1 bn through internal accruals. Further, the company also took a bank loan of US$ 980 m for the same.

Currently, the debt on the consolidated balance sheet stands at around US$ 5.4 bn, while that on the standalone stands at around Rs 75 bn (approx. US$ 1.6 bn). The average interest cost on the debt is around 7% annually and all the repayment dates are scheduled from 2015 onwards. As far as the expansion plans are concerned, the company plans to raise debt in a ratio of 70:30. Further, company is also planning to raise funds up to US$ 500 m through a QIP or GDR issue.

What to expect: The company expects the domestic demand to remain robust backed by governments increased focus on spending on infrastructure and power sector. In fact, the domestic markets currently are quite upbeat despite the global slowdown. On the global level, while demand in Europe and US is expected to remain subdued, the same in Brazil and Asia is projected to surge ahead.

With respect to Novelis, the company has planned various measures that would result into a cost saving of US$ 140 m in FY10. It has shut down a unit at UK to counter the slowdown in European markets. However, the company expects Novelis to put up a good performance in the cans business, which is largely projected to remain less affected despite the slowdown. As a matter of fact, over 50% of revenues of Novelis comes from the cans segment.

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