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Indal joins the expansion bandwagon - Views on News from Equitymaster
 
 
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  • Sep 21, 1999

    Indal joins the expansion bandwagon

    The Indian Aluminium Company (Indal) has announced an ambitious plan to expand its alumina capacities, enhance it captive power capacity and set up a new aluminium plant at a cost of Rs 8 bn. The news of Indal’s expansion plans incidentally comes just after a week of the announcement made by Hindalco of its intentions to set up a brownfield aluminium plant at a cost of Rs 25 bn.

    Indal (FY99 Sales Rs 11.4 bn), a 51% subsidiary of Alcan, Canada is primarily engaged in the production of value-added aluminium products like aluminium sheet (52% of sales), special grade chemical alumina (25%) and aluminium foils (15%). The company is unable to meet all its requirements for aluminium metal in-house and makes up the shortfall through open market purchases. This makes the profitability of the company more susceptibe to the volatility in aluminium prices.

    The company now proposes to:

  • step up alumina (main raw material for manufacture of aluminium metal) capacity to 510,000 tonnes per annum at its Belgaum plant in Karnataka at an estimated cost of Rs 4 bn
  • enhance alumina capacity to 300,000 tonnes per annum at its Muri plant in Bihar
  • commssion a new captive power plant at Hirakund (Orissa)
  • set up a greenfield alumina project in Orissa in partnership with Alcan and Hydro Aluminium of Norway.

    The company’s move to increase it alumina capacities is indicative of its focus towards the alumina and alumina chemicals business. The enhanced capacities will help it achieve a higher level of backward integration, thus improving the prospects of earning higher margins in the future. During FY99, Indal sourced 17% of its aluminium requirements from tolling of alumina (tolling refers to contracting the conversion of alumina into aluminium to thrid parties). The increased production of alumina will see the share of tolled aluminium to total aluminium increase in the future. Besides the export of surplus alumina will anable it to earn valuable foreign exchange to funds it duty free imports of aluminium metal.

    The expansion plan, expected to be completed over a period of three years, is likely to improve the company’s bottomline. A key contributor to the improved performance will be the captive power plant. In the aluminium business, power is a critical component and accounts for almost 40% of the cost of production. Besides, it is seen that power generated internally is at least 3 times cheaper than purchasing power from the state grid. In the past Indal has had to operate it aluminium smelters at lower than 100% capacity due to lack of cheap and regular power. With its enhanced power generating capacity, Indal may well see the benefits of cheaper and more competitive cost of production.

    The demand for aluminium in the domestic market has been on the rise after a period of two years, during which the industry was suffering from high inventory levels and low metal price. This improvement in the domestic market has been assisted by an up trend in global demand and prices. Asia region is a major consumer of aluminium and almost 30% of demand for the metal arises in this region. The improved economic conditions in the Southeast Asian countries have increased the demand for the aluminium in this region. The price of aluminium has consequently moved up by 11% at the LME since April 1999.

    However, it should be borne in mind that these plans are to be executed over a three year period, by when the situation could turn for the worse, as fresh capacities go on stream. Already there are global majors like Kaiser (USA) who have announced their plans to restart their alumina capacities early next year.

    Market View:

    The stock has been rated as a ‘HOLD’ by the analysts, who prefer the lower cost aluminium producers, Hindalco and Nalco.

     

     

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