Hindalco Novelis Finallll

HINDALCO-NOVELIS DEAL
Industry Overview:
 The Indian aluminium sector is characterized by large integrated players

like Hindalco and Nalco.
 The other players include Indal which is now a part of Hindalco. There
are also players like Balco and Malco.
 The per capita consumption of aluminium in India is only 0.5 kg as

against 25 kg in USA, 19 kg in Japan and 10 kg in Europe.
 Even the world’s per capita consumption is 10 times that of India.
 The demand of aluminium is expected to grow at 9% p.a. from current

consumption level.
Features of Indian Aluminium Industry:
 Highly concentrated industry with only 5 primary plants in the country.
 Controlled by only a few players.
 Electricity, coal and furnace-oil are primary energy inputs.
 All plants have their own captive power units for cheaper and un-
interrupted power supply.
 Energy is 40% of manufacturing cost for metals and 30% for rolled
products.
 Energy management is a critical focus in all the plants.
 Each plant has an Energy Management Cell.
SUSHANT WARERKAR Page 1

 High cost of technology is the main barrier in achieving high energy

efficiency.
About Hindalco Industries:
 Hindalco Industries a flagship company of Aditya Birla Group is

structured into two strategic business alliances- copper and aluminium.
 It has an annual revenue of US $ 14 bn and market capitalization in

excess of US $ 23bn.
 It commenced its operations in 1962 and today it has grown to

become the country’s largest integrated aluminium producer.
 It also ranks among the top quartile of low cost producers in the world.
 The aluminium division’s product range includes alumina chemicals,

primary aluminium ingots, billets, rolled products, extrusions, wire rods,
foils and alloy wheels.
Shareholding Pattern:

Operations In India:

Global Presence:

Hindalco: Impressive Growth:
Hindalco Growth Path:

Consolidated Hindalco:
Hindalco Business:

Domestic Market Share:
Division Market Share [ % ]

Primary aluminium 42
Rolled products 63
Extrusions 20
Foils 44
Wheels 31
Sales Revenue Of Aluminium Business:
Production Capacities:

Expansion Plans:

Stock Highlights:

Stock Reactions:
Company Growth v/s Industry Growth:

Peer Comparison:
FY 08- A Challenging Year:
Consolidated Financial Highlights:

Future Outlook:
About Novelis:
 It is the world leader in aluminium rolling.

 It produces an estimated 19% of the world’s flat rolled aluminium

products.
 It is the world leader in the recycling of used aluminium beverage

cans.
 It is the no. 1 rolled products producer in Europe, South- America

and Asia and the no.2 producer in North- America.
 Some of its customers include- Coca- Cola, Ford and General Motors.
 The company had 36 operating facilities in 11 countries as of

December 31, 2005.
Global Presence:
Product Portfolio:
Novelis Supplies World Leaders:
Leader In Auto Sheet Maker:

Leader In Can Sheet Market:
Attractive Industry Fundamentals:

 Significant barriers to entry exist in the aluminium rolled products

industry:
1. Large capital cost.
2. Long lead times to install cost competitive plants.
3. Technological requirements, premium on “ know-how.”
4. Customer qualifications demand.
 Rising service, quality and efficiency demands of large global

customers.
 Continued growth in aluminium consumption particularly China

and India.
 Price structure insulates producer from the variability of primary

aluminium prices.
Novelis Regional Overview:

Balanced Portfolio And Market Position:
World Of Novelis:

Market Share Of Aluminium Rolled Products:
Diversified Presence:

Growth Platforms For Novelis Fusion:
Investments For Strategic Growth:

Growth Model:
Past Performance Novelis:[ Million $ ]

Rationale For Acquisition:
 The combination of Hindalco and Novelis establishes an integrated

producer with low cost alumina and aluminium facilities combined with
high-end rolling capabilities and a global foot-print.
 Hindalco will be able to ship primary aluminium form India and

make value added products.
 The acquisition will increase Hindalco’s scale of operation , entry into

a high-end downstream market and enhancing global presence.
 Novelis is a global leader [in terms of volume] in rolled products with an

annual capacity of 2.8 million tonnes and a global market share of 19%.
 Novelis has a capacity to produce 3 million tonne while Hindalco has

a capacity of 2,20,000 tonne.
 Hindalco plan to triple aluminium output to 1.5 million metric tonne by

2012 to become the world’s 5th largest producer.
 By acquiring Novelis, Hindalco fulfilled it’s dream to become the

world’s largest producer of aluminium flat rolled products.
 This acquisition gives access for Hindalco to high-end products and also
superior technology.
 This deal will give Hindalco a strong presence in recycling of

aluminium business.
 It would have taken a minimum of 8-10 years for Hindalco for

building these facilities.
 Hindalco also get the fusion technology of Novelis which increases the
formability of aluminium.

 According to reports it would take 10 years and US $12bn to build

the 29 plants that Novelis has with capacity close to 3 million tonnes.
 The purchase strategically shifts Hindalco from an upstream aluminium

producer to a downstream producer
Facts About The Bid:
 Unlike the Tata-CSN shootout, the bidding was low profile.
 The identity of other bidders and the price they offered are not known,
though Birla said that the bidding was very competitive.
 Hindalco made only one bid- 44.93$.That won the deal.
Rules Of The Deal:
 If 66.66% of the shareholders okay the deal, remaining shareholders will

be compelled to sell their share to Hindalco under the Canadian law.
 If the 66.66% approval is not obtained, Birla has the right to walk away
from the deal.
 Hindalco made the Novelis board sign a $100- million breakfee, the price
Novelis has to pay if it finds another buyer.
 There was also a clause of ‘new buyer premium ’of a ‘few dollars a share’
over the 44.93$ per price- only at that price can Novelis entertain a fresh
rival bid.
 So if a new bidder enters, it has to cough up atleast $5 a share more than

what Hindalco did.
Facts Of The Deal:

 The deal was an all cash transaction of US $6 bn, which included debt
of US $ 2.4bn.
 Hindalco will pay $ 44.93 in cash for each outstanding common share
of Novelis, around 15% premium to the market price.
 The agreement requires 66.66 per cent of Novelis shareholders present

and voting to tender their shares. Otherwise, Hindalco will walk away. If
this condition is satisfied, the remaining one-third of shareholders will be
"squeezed out," (will have to sell to Hindalco).
 Post-acquisition, over 50 per cent of the group's business could come
from operations outside India, which is currently at 30 per cent.
 Also, 20 per cent of the group's total workforce would also be based
outside India.
 After the merger Hindalco will emerge as the largest rolled

aluminium products maker and 5th largest integrated aluminium
manufacturer in the world.
 Novelis brings in high technology support.
 Novelis has a global market share of 19% while Hindalco enjoys a share
of 60% in the rolled products market.
 The Novelis acquisition will give Hindalco a strong global foot-print .
 Novelis is operating in 11 countries with around 12,500 employees.In

2005, the company reported net sales worth US $8.4bn and net profit of
US $90 mn.
 Novelis reported net sales of US $7.4 bn and net loss of US $170 million
in nine months during 2006, on account of low contract prices.

 Novelis has a rolled product capacity of 3 million tonne while Hindalco

at this moment does not have any surplus capacity.
 Hindalco’s Greenfield expansion will give it a primary aluminium

capacity of approximately 1 million tonne, but it will take around 3-4
years for all these to come into operation.
 Considering these factors, Hindalco’s profitability is expected to remain

under pressure and this will bounce back in 2009-10
 The debt burden of Novelis stood at US $2.4bn and additional US

$2.8bn will be taken by Hindalco to finance the deal.
 This will put tremendous pressure on profitability due to high interest

burden.
 Hindalco’s current expansion plans will cost Rs 25,000 crores and as

a result debt burden and interest will increase further.
Funding Structure:

Funding Pattern:
 The Novelis acquisition of US $6bn is been funded through US $3.1bn of

loan.
 Hindalco personally will contribute USD 450 million.
 Aditya Birla group company Essel Mining will contribute USD 300
million.
 Hindalco plans to raise USD 2.8 bn of debt through 2 special purpose

vehicles.
 US $455mn through liquidation of investments.
 Existing loan of US $2.4bn will be replaced by term loan of US $1bn and

high yield bonds of US $1.4bn.

Financial Challenges:
 The acquisition will expose Hindalco to a weaker balance sheet.
 The company will move from high margin metal business to low margin
downstream products business.
 The acquisition will more than triple Hindalco’s revenues, but will
increase the debt burden and erode profitability.
Risk Factors:
 The deal will create value only after completion of Hindalco’s expansion
plans, and due to its highly leveraged position, its plans may get affected.
 Novelis profitability could be adversely affected by the inability to pass

through metal price increases due to metal price ceilings in certain of the
company’s sales contracts.
 Some of the customers are significant to the company’s revenues and any
change in their business or financial conditions could adversely affect the
company’s business.
 Adverse changes in currency exchange rates could negatively affect the

financial results and competitiveness of company’s aluminium rolled
products relative to other materials.
 Unexpected fall in aluminium prices could adversely impact earnings.
 The end-use markets for certain products of Novelis products are highly
competitive and customers are willing to accept substitutes for the
company products.

FUTURE:
Future Of Aluminium:

Investment Required:
Financials:
1. Consolidated:

2. Standalone Performance: [ Hindalco ]


3. Consolidated Balance Sheet:

4. Segmental Performance:
5. Aluminium- Sales Volume/ Realization:

6. Operational Performance:


7. Production Growth:
8. Key Ratios- Aluminium:

SWOT Analysis:
 Strengths:
1) Post acquisition of Novelis, Hindalco has become the world leader in

flat-rolled aluminium products and recycling of aluminium cans.
2) It is also the leading producer in primary aluminium and alumina in

Asia.
3) It has a strong geographical presence- North and South America, Asia

and Europe.
 Weakness:
1) The R&D expenditure is very low compared to industry standards.
 Opportunities:
1) Strong growth in demand for aluminium.

 Threat:
1) Prices of primary metals are highly volatile.
2) Disruption in production due to external factors.

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HINDALCO-NOVELIS DEAL

 The Indian aluminium sector is characterized by large integrated players

 The per capita consumption of aluminium in India is only 0.5 kg as

 Even the world’s per capita consumption is 10 times that of India.

 The demand of aluminium is expected to grow at 9% p.a. from current

Features of Indian Aluminium Industry:

 Highly concentrated industry with only 5 primary plants in the country.

 Controlled by only a few players.

 Electricity, coal and furnace-oil are primary energy inputs.

 Energy management is a critical focus in all the plants.

 Each plant has an Energy Management Cell.

SUSHANT WARERKAR Page 1

 High cost of technology is the main barrier in achieving high energy

About Hindalco Industries:

 Hindalco Industries a flagship company of Aditya Birla Group is

 It has an annual revenue of US $ 14 bn and market capitalization in

 It commenced its operations in 1962 and today it has grown to

 The aluminium division’s product range includes alumina chemicals,

SUSHANT WARERKAR Page 2

SUSHANT WARERKAR Page 3

SUSHANT WARERKAR Page 4

Hindalco: Impressive Growth:

Hindalco Growth Path:

SUSHANT WARERKAR Page 5

SUSHANT WARERKAR Page 6

Domestic Market Share:

Division Market Share [ % ]

Sales Revenue Of Aluminium Business:

SUSHANT WARERKAR Page 7

SUSHANT WARERKAR Page 8

SUSHANT WARERKAR Page 9

Company Growth v/s Industry Growth:

SUSHANT WARERKAR Page 10

FY 08- A Challenging Year:

Consolidated Financial Highlights:

SUSHANT WARERKAR Page 11

 It is the world leader in aluminium rolling.

SUSHANT WARERKAR Page 12

 It produces an estimated 19% of the world’s flat rolled aluminium

 It is the world leader in the recycling of used aluminium beverage

 It is the no. 1 rolled products producer in Europe, South- America

 The company had 36 operating facilities in 11 countries as of

Novelis Supplies World Leaders:

Leader In Auto Sheet Maker:

SUSHANT WARERKAR Page 14

Leader In Can Sheet Market:

Attractive Industry Fundamentals:

SUSHANT WARERKAR Page 15

 Significant barriers to entry exist in the aluminium rolled products

1. Large capital cost.

2. Long lead times to install cost competitive plants.

3. Technological requirements, premium on “ know-how.”

4. Customer qualifications demand.

 Rising service, quality and efficiency demands of large global

 Continued growth in aluminium consumption particularly China

 Price structure insulates producer from the variability of primary

Novelis Regional Overview:

SUSHANT WARERKAR Page 16

Balanced Portfolio And Market Position:

SUSHANT WARERKAR Page 17

Market Share Of Aluminium Rolled Products:

SUSHANT WARERKAR Page 18