"We expect Indal to benefit considerably from Hindalco’s expertise ..." - Views on News from Equitymaster

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  • Sep 30, 2000 - "We expect Indal to benefit considerably from Hindalco’s expertise ..."

"We expect Indal to benefit considerably from Hindalco’s expertise ..."

Sep 30, 2000

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 his second interview for Equitymaster.com Mr. Kasliwal spoke on the rising aluminium prices,

EQM: Aluminium Prices have spurted in recent days. To what do you attribute the current firmness in prices? Will the price rise sustain?

Mr. Kasliwal: Aluminium prices in beginning of the current fiscal year did not reflect the fundamentals. Prices were weak despite good economic fundamentals, strong consumption growth, production cutbacks and shrinking inventories. Factors such as concerns about the US Economy, a weak Euro and funds exiting the metals sector contributed to decline in prices at various points of time in the preceding months.

But the question being asked all along was – when will the strong fundamentals override these negative factors.

Prices existing today reflect the existing good fundamentals. We have strong growth in Asia, Europe and the Eastern Bloc. Japan is recovering. Demand continues to grow in the USA. World Aluminium consumption in calendar year 2000 has grown so far by a strong 6 %. Inventories are very low. With a surge in power costs, there are serious concerns about the continuation of output from North American smelters. The recovery in the Eastern Bloc is expected to result in reduced supplies of metal – it must be remembered that metal from the Eastern Bloc is an integral part of the supply/demand balance. There are good trends in aluminium consuming sectors such as transportation, construction and consumer durables. We therefore believe that the outlook for prices is very encouraging.

We anticipate prices to be in the vicinity of US$ 1,600 - 1,650 per tonne during the second half of the year – at times we tend to agree with the stronger forecasts of US$ 1,700 per tonne.

EQM: How has the difference between the landed cost of Aluminium imports moved in relation to domestic prices? Do you see Indian companies responding to the rise in global prices?

Mr. Kasliwal: The difference between the landed cost of Aluminium imports have moved upward from Rs 10,000 in June to about Rs 16, 000 per ton currently.

We do not view every uptrend in international prices as opportunity to raise domestic prices. We believe in price stability and value our long-term relationship with customers. We are also very aware of the need for aluminium to stay competitive.

You will find this belief reflected in current prices – cost of metal of indigenous origin is substantially lower than the cost of imported metal. This reflects the fact that we do not believe in exploiting spikes in international prices. Speaking for ourselves, we respond to increases in international prices after considering all relevant factors.

EQM: Fuel costs have risen sharply over the last few months. How do you see this impacting Hindalco?

Mr. Kasliwal: Yes, oil prices have touched 10 years high in the international market. We can work out the impact of an increase in oil prices once the Government announces the extent of increase in prices.

Petroleum products constitute less than 10% of the cost of production for Hindalco. Given so, we may not have a very significant direct impact. But we shall definitely be impacted by the across the board inflationary pressures which are expected to result from a price increase – as I have mentioned earlier, the extent of this impact will only be clear once the increase is effected.

EQM: What level of integration has been reached in the working of Indal and Hindalco? Does the company have an estimate for cost savings arising from this new relationship?

Mr. Kasliwal: We have initiated the process of integration and synergy achievement. Our teams are working on strategies to optimize production as well as the marketing and distribution channels for the two companies. We expect significant progress in the implementation of these strategies within the next 2-3 months. Consequently, we should see some benefits accruing during the second half of the current financial year. We are working on a timetable with a view to ensure that full-scale synergy related benefits are realized in about 30 months.

Exchange of expertise between companies is an integral part of the culture of the Aditya Birla group. MIS reports and ‘Parta’ system is being implemented at Indal.

We expect Indal to benefit considerably from Hindalco’s expertise in ensuring a high levels of asset utilization and process efficiency.

Hindalco and Indal complement each other with respect to requirement of metal and alumina. Hindalco has been purchasing Alumina from Indal – we are continuing this partnership today – and in turn are a source for metal supply for Indal.

Combined rolled products capacity is 170,000 tonnes whereas the production last year was only 110,000 tonnes. There is considerable potential to scale up volumes. Benefits in the downstream facilities will accrue by product rationalization, product development, close proximity to key markets and improved customer service.

We are also identifying the possibilities of synergy related benefits in the foil business of the two companies.

It will be premature to quantify estimated cost savings at this point of time.

EQM: How are the company’s expansion plans progressing? When do you see the fresh capacity going on stream?

Mr. Kasliwal: Our Rs 18 bn Brownfield expansion is progressing very well. We will be adding 100,000 tonnes of aluminium smelting capacity. We will also be adding 210,000 tonnes to our alumina refining capacity whereas power generation capacity will stand increased by 150 MW. Best of all, with our in-house engineering capabilities, the expansion will be feasible at very low cost. The programme will be completed in phases by FY 2003-04.We expect the first phases to come on stream by FY 2002.

EQM: There have been some reports in the press that the company is looking at acquiring capacities. Please could you shed more light on this issue?

Mr. Kasliwal: Hindalco has restated its three pronged strategy involving efficiency focus, effectiveness focus and growth focus.

As per the third limb of the strategy, Hindalco shall pursue value added growth opportunities only in aluminium and related businesses. Besides expansion, if acquisition makes economic sense and creates value for shareholders, Hindalco is open to examine opportunities including divestment of public sector undertakings, as and when such opportunities present themselves.

We believe that consolidation in the Indian Aluminium Industry is a necessity. Our acquisition of shares in Indal bears ample testimony to this belief. The reason for our belief is very simple – we must come together so as to ensure the cost efficiency and the high levels of quality that the globalize market place will increasingly demand in the coming years.

We are working to equip Hindalco to face challenges in the new millennium.

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