• MARCH 24, 2003

Hindalco: Consolidation gains

Hindalco, the flagship company of the Aditya Birla Group, is the largest private sector aluminium company in India. The company accounts for about 40% market share of the primary aluminum segment. Hindalco’s acquisition of another aluminium major, Indian Aluminium Company Ltd. (Indal) further strengthens the company’s position in the aluminium sector. Hindalco acquired a 74.6% stake in Indal by buying out Alcan’s stake in the company. Then through an open offer for further 20% equity, Hindalco upped its stake in Indal (current stake 94.6%).

Indal is vertically integrated through all stages of the aluminium business – from bauxite mining, alumina refining, power generation, aluminium smelting, aluminium scrap recycling and also semi-fabricated products of sheet, foil and extrusions. The company has a leading market share in specialty alumina chemicals and value added products.

Capacity: Post-merger
(TPA) Hindalco Indal Combined
Alumina 660,000 400,000 1,060,000
Metal 342,000 72,000 414,000
Rolled 80,000 90,000 170,000
Rods 40,000 10,000 50,000
Extrusion 13,700 8,000 21,700
Foils 5,000 9,000 14,000
Recycled Metal - 25,000 25,000
Power (MW) 809 136 945

Despite the significant stake, Hindalco and Indal have not merged as yet. Hindalco management sites high stamp duties as one of the key reasons discouraging merger moves. However, the merger of these two companies is mutually beneficial. Hindalco has a strong presence in the aluminium metal segment, while not so strong in alumina. However, Indal has a significant presence in alumina, but is short of capacity in the metal segment. The company is also strong in the semi-fabrication area. The advantage for Hindalco lies in the fact that the company can source its alumina requirements from Indal while the latter can source its metal requirement from the former.

In fact, the Hindalco-Indal combine focus on strengthening presence in the profitable segments of the downstream markets, sheets and foils in particular, has started to pay off. The combine now has a 70% market share (FY02) in the downstream products segment. Also, the two companies together account for over 50% of the domestic aluminium capacity.

Apart from the operational synergies that the two companies share, the merger also provides a huge advantage on the financial front for Hindalco. The merger provides Hindalco with greater strength and size in balance sheet. This augurs well for Hindalco, as the company plans to bid for the government’s stake sale in National Aluminium Company Ltd. (Nalco). With a stronger balance sheet, the company will not have to enter into a financial partnership with another player in order to put a competitive bid for Nalco’s stake. It must be noted here that Sterlite Industries (acquirer of Balco) also plans to participate in the sale of Nalco.

At Rs 560, Hindalco trades at a P/E of 8.4x 9mFY03 annualised earnings. On the other hand, at Rs 120, Indal trades at a P/E multiple of 7.6x 9mFY03 annualised earnings. Going forward, the domestic demand outlook for aluminum remains positive. With the restructuring of state electricity boards and power reforms on the cards, the growth prospects of the domestic aluminium sector are immense. Also, demand from automobile, consumer durables, housing and infrastructure sectors will further help industry growth.

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