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Hindalco: Rights issue - Views on News from Equitymaster
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Hindalco: Rights issue
Nov 23, 2005

Hindalco, the Indian aluminium major, had announced a rights issue in the ratio of 1:4 i.e. 1 share for every 4 shares. While the record date for the rights issue has been fixed on November 28, 2005, the rights issue has been priced at Rs 96 per share (Re 1 face value, Rs 95 share premium). Considering that the company’s current equity shares stand at about 928 m, additional equity of about 232 m shares would be issued. At Rs 96 per share, the company would, be raising over Rs 22 bn in phases (spread over a 2-years). The proceeds from this issue would be used to part finance its ambitious capital expenditure plans (Rs 120 bn) that would take it to the league of top 10 aluminium and alumina producers in the world. The company announced various expansion plans, which includes a mix of brownfield and greenfield projects as well as joint ventures. Below listed are the company’s expansion plans and the estimated capex over the next few years:

Capex Plan (as per Rights Issue Prospectus)
  FY06E FY07E FY08E Beyond
Expansions
- Muri Alumina (110,000 TPA to 450,000 TPA) 3,760 3,500 - -
- Hirakud Aluminium (65,000 TPA to 146,000 TPA) 3,250 4,710 1,840 260
- Belgaum Alumina (350,000 TPA to 650,000 TPA) - 1,020 5,010 2,400
Greenfield Projects
- Aditya Aluminium (260,000 TPA) - 3,860 8,580 34,730
- Aditya Alumina (1,000,000 TPA) - 5,070 8,250 17,320
Joint Venture
- Utkal Alumina (1,000,000 TPA) - 2,435 3,750 6,115
Total 7,010 20,595 27,430 60,825

The non-ferrous metals powerhouse
Hindalco, an AV Birla Group company, is India’s largest aluminium producer and has the distinction of being one of the lowest cost producers of the metal in the world. It is an integrated player, having captive bauxite mines, power units and high value-added output comprising semi-fabricated aluminium products. While the aluminium business of the company contributes to almost half of the company’s revenues, its share in profits is much higher at over 80%. The company’s copper business (acquired from Indo Gulf) contributes to the balance of the revenues and profits.

Our view
While the company’s expansion plans is a positive one, the benefits will accrue in the long-term (FY08 onwards). In the short-term however, this is a negative for investors. This is because, with the equity dilution coming into effect immediately on a fully diluted basis, the return ratios and the book value of the company would stand adversely affected to that extent, as the revenues from the planned capacity expansions would be visible only in phases.

Our subscribers must note that our numbers have incorporated the Muri Alumina and Hirakud Aluminium capacity expansion plans in our FY07 estimates. However, considering the 25% dilution in equity and its consequent impact on the book value per share, the target price needs to be scaled down. Thus, as per the updated numbers, the price target stands reduced to Rs 177. However, investors must note that the average acquisition price too would stand reduced considering the fact that the rights issue price is lower by 38% than the price at which the recommendation was given. Thus, considering the ratio of the rights issue, the average acquisition would stand reduced to Rs 142.

While maintaining our view, we continue to believe that considering the scenario prevailing in the aluminium and copper industries, wherein global supply continues to lag demand, Hindalco would stand to benefit. Further, the company’s continued focus on increasing value added sales would provide stability in terms of earnings and margins, as this segment is relatively insulated from the sharp volatilities witnessed in metal prices. We believe that growth in power, transport, construction and packaging sectors augur well for the company. Moreover, with increased metal production capacities, it is well placed to continue to capitalize on the economic and industrial upturn.

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