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Beating the competition - Views on News from Equitymaster
 
 
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  • Dec 10, 1999

    Beating the competition

      After functioning for over 3 decades in an era of the protective licence raj, being exposed to a market where competition exists at a global level would probably make most India companies weak in the knees. But not this company. Hindalco Limited has lived through both environments of protection and cutthroat competition and has emerged unscathed.

      Hindalco is the flagship company of the Aditya Birla Group. The Group, highly respected for its business acumen and credibility, is one of India's largest business houses with a turnover in excess of Rs 200 bn and fixed assets of over Rs 180 bn. Hindalco, initially promoted by the Birlas and Kaiser Aluminium, USA in 1958 has grown to become India's largest integrated aluminium producer with a capacity of 375,000 tonnes of aluminium metal. Low cost production, incremental capacity additions, continuous modernisation and efficient asset utilisation have been the underpinnings of Hindalco's strategy. The company is vertically integrated right from the mining of bauxite till the production of value-added products like extruded products, rolled products, rods and foils.

        Aluminium has remained the sole focus of the company. The management of the company has been responsive to the changes in the environment and has taken steps accordingly to ensure efficient running of its business. Envisaging a power-deficit scenario, Hindalco installed a 100 percent captive power unit as early as 1967. The power plant (612 MW) has been run at peak load factors, and has today, made Hindalco completely self sufficient in its power requirements. The net result is that its efficiency norms are better than most of its peers.

      This backward integration strategy of Hindalco has paid it rich dividends. The captive sources for bauxite and power and proximity from coal mines to its power plant and smelter give Hindalco an unmatched competitive advantage. In fact, it is rated amongst the cheapest producers of aluminium in the world. Besides, being an integrated producer, it has more flexibility in pricing as compared to its competitors in the local market who convert from scrap or metal, especially in situations when prices are rising. The company is seen, more often than not, as the leader in setting prices for the domestic industry.

      The fortunes of aluminium companies in India are dependent on several key factors and Hindalco is no exception to any of these. With a fall in import duties on aluminium, Indian companies today, no longer enjoy the protection available to other sectors. Besides domestic competition, Indian aluminium companies also have to compete with relatively cheaper imports. This makes the profitability of these companies very vulnerable to changes in the international prices of aluminium and the value of the Indian rupee. In recent times, aluminium companies in India have had a mixed run. Though the prices of aluminium declined (leading to a squeeze in margins), the value of the rupee also fell. This made aluminium cheaper to export from India, and that much more expensive to import. With its fundamentals in place, Hindalco has been able to face the challenges of weak demand and prices, both in international and domestic markets.

      In order to increase value addition, Hindalco has now added and modernised downstream facilities (rolling, extrusion, foils). It is now focussed on increasing its downstream sales to improve margins and drive bottomline growth. It is pricing its products aggressively to penetrate the market. During the first quarter of the current financial year, Hindalco's turnover growth of 14.5 percent was lead by an improvement in sales mix. The company sold more of higher value rolled products and foils. Thus while metal production increased by 5.6 percent and average prices were up 3.5 percent, the product mix changes lead to a further 4.7 percent improvement in turnover.

      The recent run up in aluminium demand and prices have made analysts look up and take notice. The stock has been a star performer at the bourses raking in impressive gains of over 100 percent over just the past 6 months. But that is not the only reason. The market has appreciated the recent shift in the perspective of the Birla Group, which was recently spelt out by Chairman, Kumar Birla. It espouses a clear focus for each group company, within its ambit of businesses, and efforts to unwind the investments made by the companies in unrelated businesses. In line with its new credo, Hindalco shelved its proposed greenfield aluminium project and is instead considering a brownfield expansion. It also made a bid for Balco, an integrated aluminium company, for which the government has announced a strategic sale of its stake. With the overhang of a fresh plant now out of the way, industry observers are seeing Hindalco in a new light. The new focus may also see Hindalco reduce in large investments (Rs 4.8 bn in financial year 99) in group companies.

       

       

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      More Views on News

      Hindalco: Strong Performance at Operating Level (Quarterly Results Update - Detailed)

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      Hindalco Industries: Realisations Hurt Topline (Quarterly Results Update - Detailed)

      Feb 17, 2016

      Hindalco Industries has reported a 5.3% decline in topline while the bottomline has declined by 88.7%

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