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Hindalco firms up expansion plans - Views on News from Equitymaster
 
 
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  • Sep 16, 1999

    Hindalco firms up expansion plans

    According to newspaper reports, Hindalco Industries Ltd. is setting up a 0.1 m tonnes per annum brownfield aluminium smelting project at Renukoot at an estimated cost of Rs 25 bn. The company is likely to finalise its technical and funding requirements shortly.

    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 company's decision to expand capacity comes at a time when the aluminium sector is witnessing a surge in demand and a firming up of prices. The global demand and prices have risen mainly due to the recovery in the economies of Southeast Asia and Japan. The surge in prices has also been the result of supply side factors. The fallout of these factors on the domestic market is clearly reflected in the surge in production and prices in the domestic market.


    Source: CMIE

    Hindalco's decision to set up a brownfield project will have definite advantages over its earlier proposal to set up a greenfield capacity. The former will benefit from an already well-developed infrastructure (including power and roads), existing supply chain and administrative systems, all of which will contribute to lower setup costs. As a result of this, the company would be able to largely finance the project from internal resources.

    On the other hand, the greenfield venture, which was to be set up in Orissa, would have entailed large capital expenditure due to the absence of even basic infrastructure facilities at the proposed site. Apart from this, the greenfield venture would have taken more time to commission and also involved a larger amount of external funding, which would then have led to either higher debt servicing costs or equity dilution.

    Hindalco's decision to expand capacity has come at an opportune time. However, there is a possibility that large smelting capacities, which are not in operation currently, could go on stream, in which case the demand supply gap may turn for the worse.

    Market View:
    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.

     

     

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