Case study


US $28 billion corporation, in the league of Fortune 500.  Extraordinary force of 100,000 employees, belonging to 25 different nationalities.  "The Best Employer in India and among the top 20 in Asia" by the HewittEconomic Times and Wall Street Journal Study 2007.  Over 50 per cent of its revenues flow from its overseas operations

A metals powerhouse, among the world's most cost-efficient aluminum and copper producers. Hindalco-Novelis is the largest aluminum rolling company.  No.1 in viscose staple fibre  The fourth largest producer of insulators  The fourth largest producer of carbon black  The 11th largest cement producer globally, the seventh largest in Asia and the second largest in India  Among the world's top 15 BPO companies and among India's top four

4 billion of debt. which values Novelis at enterprise value of US $6. including approximately US $2.0 billion. The acquisition of Novelis by Hindalco was in an all-cash transaction. .  After merger Hindalco will emerge as the biggest rolled aluminium products maker and fifth -largest integrated aluminium manufacturer in the world.

 The Novelis acquisition will give the company immediate scale and strong a global footprint  Novelis has a rolled product capacity of approximately 3 million tonne .

 Hindalco has a 60% share in the currently small but potentially high-growth Indian market for rolled products  Novelis will work as a forward integration for Hindalco as the company is expected to ship primary aluminium to Novelis for downstream value addition. with a global market share of about 19%. . Novelis is the global leader in aluminium rolled products and aluminium can recycle.

 Novelis is a globally positioned organization. the company reported net sales of US $8. .  In 2005. operating in 11 countries with approximately 12.4 billion and net profit of US $90 million.500 employees.

Aluminum manufacture is accomplished in two phases:  Bayer process of refining the bauxite ore to obtain aluminum oxide  Hall-Heroult process of smelting the aluminum oxide to release pure aluminum

Bauxite ore is mined; four or five tonnes of bauxite ore are used to refine into two tonnes of alumina, which is then smelted to yield one ton of aluminium

Aluminum* is melted and mixed with various alloys depending on the product to be made, then cast into ingot and billets, rolled and extruded; intermediate products are then cut, shaped, and molded into wide range of products for use in applications such as airplanes, automotive, beverage cans, and construction

Bauxite ore is refined into aluminium oxide or alumina

Alumina is reduced to primary aluminum by the process of electrolytic reduction




saucepans. transmission housings. door knobs . kettles. Other parts such as carburettors housings. Railway carriages Aluminium Uses In Cars -wheels. tennis bats. engine blocks. suspension components. Valve covers are also made of aluminium   . toasters. refrigerators. wheel spacer bars are made of aluminium. mirrors. utensils in the kitchen aluminium foils outdoor furniture. hoods. Transportation . brackets. boats and ship construction . few ornaments and logos. At Home. alternator housings. of aircraft. aluminium handles.window frames. air filler adapters.

Staircases are also made from aluminium  Aluminium . Uses in Construction Aluminium scrap. bars. utensil lids. fabricating. foils. railings. wire. rods. shutters. etc. Other aluminium uses for packaging are storage boxes. stampings. bottle caps. etc. skylights. pins. also used in commercial buildings. Packaging-Drink cans. sheets. tubing. are all made out of aluminium. thermos. casting. ladders. tanks. doors. trays. building bridges. pipes. windows. etc.

Transportation and construction applications account for more than one-half of global demand  Aluminum usage differs by region and state of economic development – In developed economies. the greatest demand is for transportation based applications – In developing economies. construction-based applications (residential and commercial) are the largest source of demand  .

and rivets. Examples of end-products by segment – Transportation : aircraft. nails. ships. to siding. gutters. roofing. electric transmission lines almost exclusively use aluminum . automotive – Building & Construction : from screws. etc. – Packaging : soda cans and packaging for keeping food and cosmetics fresh – Electrical : aluminum conducts electricity almost as well as copper and has a cost advantage.

– Consumer durables : aluminum foil.Machinery & Equipment : internal parts of large and small machines and household appliances. etc. fencing. assorted tubes. containers .

 Second most consumed metal in world  Developed economies account for about 75% of global consumption  Significant growth predicted in developing world – Overall GDP growth accompanied by increases in per capita aluminium consumption – China‘s and India‘s significant growth is expected to continue .

Per capita aluminum consumption in China & India is still very low compared to developed countries and is expected to follow their historic growth patterns  Growth also driven by the development of new and improved end-use applications  .

Eight countries are responsible for 2/3 of total world primary consumption .


Headquartered in London. The deal pushed Rio Tinto ahead of Alcoa and Rusal. England. Inc. in 2007. . which focuses on aluminum mining and production. Rio Tinto Alcan became the largest aluminum company in the world after merging with Alcan. Australia. with six different mining divisions. Rio Tinto‘s since evolved in the fourth-largest mining company on the planet. Market Capitalization : $87 billion. Rio Tinto is far and away the biggest of the major aluminumproducing companies on the major exchanges. and Melbourne. Rio Tinto was founded in 1873 when a group of investors bought a Spanish mine on the Rio Tinto river. The important one here is the Rio Tinto Alcan..

. investors will likely pounce on the stock.000 employees on their payroll. Rusal produces approximately 12 percent of the world‘s aluminum. If they ever go public.Total Estimated Assets: $30 billion. A private aluminum-producing company based in Russia. the company has interests in 13 mines across 8 countries with more than 90. Despite a hefty debt load.

and Hall himself was a co-inventor of the process used to smelt aluminum to this day. and.5 billion The Aluminum Company of America is the thirdlargest aluminum producer in the world. Today Alcoa has interests in 25 smelters in 8 countries around the world. for decades. Alcoa was founded by Charles Martin Hall in 1903. behind Rio Tinto and Rusal. the company was the only one legally allowed to supply aluminum in the United States. Hall‘s prescience helped him establish a number of smelters across the country. .Market Capitalization: $12.

the Aluminum Corporation of China is the largest aluminum producer in the People‘s Republic of China. The company owns a 9 percent stake in Rio Tinto and will soon start mining in Peru. It is. . the only producer of alumina in the country. in fact.Market Capitalization: $14 billion Also known as Chalco or Chinalco.

. BHP Biliton now has interests in 10 aluminum smelters.Market Capitalization: $174 billion BHP Biliton is the world‘s largest mining company with roots in the Indonesian archipelago where mining rights were purchase in 1860.3 million tons of aluminum every year. bauxite mines and alumina refineries with an output of 1.


 Hindustan Aluminium Company (HINDALCO)  National Aluminium Company (NALCO)  Bharat Aluminium Company (BALCO)  MALCO  INDAL .

7 million tones.  India is also a huge reservoir of Bauxite with a Bauxite reserve of 3 billion tones. . accounting almost 5% of the total aluminium production in the world. India is world's fifth largest aluminium producer with an aluminium production competence of around 2.

 An Aditya Birla Group flagship company. 31% in wheels and 44% in foils. Hindalco is the biggest player in the aluminium industry in India with around 39% of market share. 20% in extrusions 63% in rolled products. Hindalco has its aluminium plant at Renukoot in Uttar Pradesh. .  It has various aluminium products with a market share of 42% in primary aluminium.

MALCO is a fully integrated producer of aluminium. The aluminium business of Sterlite Industries Limited comprises of two Indian aluminium giants – BALCO and MALCO. While BALCO is a partially integrated. . Sterlite has got a market share of around 32%.

.000 tonnes. Government of India has a stake of 87.000 tonnes to 460.15% in this company. Orissa. Currently. It is also one of the leading aluminium producers in India. It also has a smelter located at Angul. Its aluminium refinery is located at Damanjodi. NALCO is concentrating on a capex programme to increase its production from 345.

' 'Our vision is to be a premium metals major. The acquisition of Novelis is a step in this direction' .... global in size and reach .'We look upon the aluminium business as a core business that has enormous growth potential in revenues and earnings.

aluminum and copper. with 2006 revenues of approximately $2. Hindalco is currently structured into two strategic businesses.3 billion.  market capitalization $4. a $14 billion multinational conglomerate.6 billion. with a market capitalization in excess of $23 billion. a leader in Asia's aluminum and copper industries. . Hindalco .  Established in 1958. and is the flagship company of the Aditya Birla Group.

primary aluminium ingots. Hindalco's copper division is situated in Dahej in the Bharuch district of Gujarat  Its copper smelter is the world's largest custom smelter at a single location  largest integrated aluminium producer in the India and ranks among the top quartile of low cost producers in the world  The aluminium division's product range includes alumina chemicals. wire rods. rolled products. extrusions. . billets. foils and alloy wheels.

Hindalco. Following the transaction. with Novelis. one of the biggest producers of primary aluminum in Asia. will be the world's largest aluminum rolling company. and India's leading copper producer .

across 4 continents  . The Company operates in 11 countries.  Novelis has 33 operating plants and 3 research facilities in 11 countries.500 employees. has approximately 12. and reported $8.4 billion in 2005 revenue. Novelis Inc is the world's leading producer of aluminum rolled products  Novelis has manufacturing presence in 4 continents and has marketing presence worldwide.


 In the spin-off process. etc. Novelis ended up inheriting a debt mountain of almost $2. automotive parts. and sells it to customers such as Coke and Ford .. processes it into rolled products like stock for soft drink cans.9 billion on a capital base of less than $500 million  It buys primary aluminium.

 But

the management took a wrong call on aluminium prices. In a bid to win more business from soft drink manufacturers, it promised four customers not to increase product prices even if raw material aluminium prices went up beyond a point  A few months after Novelis signed those contracts, aluminium prices shot up 39 per cent (between 30 September 2005 and 2006). To these four customers, Novelis was forced to sell its products at prices that were lower than raw material costs.

 These

four account for 20 per cent of Novelis‘s $9-billion revenues. But the management‘s wrong judgment led to losses of $350 million (in 2006).
January 1, 2010, all the sales contracts will get expired and profitability will increase substantially from then onwards.

 By

YEAR 2006 2005 2004

NET SALES 9849 8363 7755

PBT (278) 224 231

PAT (275) 96 55

flat rolled products in fastgrowing markets such as India and China . should act as a natural hedge for LME-driven. volatile. assets and expertise can be leveraged to grow highvalue-added. Immediate global reach and scale along with technological expertise  Downstream business derives its margin through conversion mark-up. upstream commodity business  Industry leading technology.

 In 2003 Hindalco was a upstream player in commoditized industry ( it made aluminum).  It decided to add downstream operations (converting aluminum into aluminum products) to its portfolio to steady the profit stream and reduce its dependence on commoditized business. so its profits varied overtime.  To that end it acquired two leading downstream companies in the aluminum industry (Indal in India & Novelis in North America .

 Post acquisitions. the joint entity will become insulated from the fluctuation of LME Aluminium prices. the company will get a strong global footprint.  After full integration. .

a prudent mix of Brownfield & Greenfield expansions Downstream growth through acquisition (Novelis) . Upstream growth through organic route.

 Post acquisitions. the joint entity will become insulated from the fluctuation of LME Aluminium prices  The deal will give Hindalco a strong presence in recycling of aluminium business. As per aluminium characteristic.  After full integration. the company will get a strong global footprint. aluminium is infinitely recyclable and recycling it requires only 5% of the energy needed to produce primary aluminium .

the replacement value of the Novelis is US $12 billion.  It would have taken a minimum 8-10 years to Hindalco for building these facilities. .  As per company details. if Hindalco takes organically route. the deal is worth for Hindalco. so considering the time required and replacement value. Novelis has a very strong technology for value added products and its latest technology ‗Novelis Fusion‘ is very unique one.

 Coca-cola  Budweiser  Ford  GM  Audi  BMW .


 Novelis being market leader in the rolling business has invested heavily in developing various production technologies. . Forty percent of the products are rolled products and Novelis is in leader in rolling business with a market share of 20%. One of such technology is a fusion technology that increases the formability of aluminium. This means that it can be better used formed into the design requirement by the car companies  All raw aluminium is processed so that it can be used in products.

Any change in the raw material price is directly passed on to the customers who range from coca cola to automobile companies like Aston martin  The current revenue of Hindalco is very much dependent on the aluminium prices and when the prices are high they make a larger margin. For Hindalco to develop such technology will take a lot of time. According to ―Standard and Poor‖ it would take 10 years and $ 12 billion to build the 29 plants that Novelis has with capacity of close to 3 million tonnes. this not the case with rolling business which usually has a constant margin.  .

 Hindalco paid US $44. Analysts believe the Birlas are paying too high a price for a company that incurred a loss of US $170 million for the nine months ended 30 September 2006. .93 a share for a lossmaking company  Novelis share prices never crossed US $30 during 2005 and 2006.

the replacement value of the Novelis is US $12 billion. the deal is worth for Hindalco.5 times. if Hindalco takes organically route.  As per company details.The valuation for the enterprise value for the deal works out to around 11.  It would have taken a minimum 8-10 years to Hindalco for building these facilities.4 times the company‘s EBITDA.  . Alcan trades at around 5.8 times its 2006 EBITDA and Alcoa at 5. so considering the time required and replacement value. and this is a highier compared to global peers.

The remaining $8 billion was raised (as debt) and repaid on the strength of the Corus balance sheet. Only $4. Effectively.  The Tatas purchased 100 per cent of Corus‘ equity for $12. the Tatas paid only a third of the acquisition price. . The funding structure of this deal is remarkably different from the leveraged buyout model that Tata Steel used to fund the Corus buy.1 billion.1 billion of this is being raised by the Tatas.

 This was possible because Corus had relatively low debt on its balance sheet and was able to borrow more. Hindalco is now borrowing almost $2. $300 million is being raised as debt from group companies and $450 million is being mobilised from its cash reserves).23:1.6 billion worth of Novelis‘s equity. it can‘t borrow any more. .85 billion (of the balance.  To buy the $3. With a debt-equity ratio of 7.  But that is not the case with Novelis.

This improvement is driven by:  Reduced exposure to the price ceilings  Improved pricing and mix  Lower corporate costs . the company‘s earnings performance on a normalized basis has improved significantly when compared to the prior year. Since the acquisition by Hindalco.

This position has been solidified by  Stronger earnings performance  Refinancing of Senior Secured Credit Facilities  Better working capital management . The company has also improved its performance on a Free Cash Flow basis and has maintained a strong position in terms of liquidity.


86 22.03 15.In Rs-crores YEAR 2004-05 2005-06 2006-07 NET SALES 9523 11355 18313 PAT 1329 1655 2564 OPM 23.9 2007-08 2008-09 2009-10 19118 18220 19536 2861 2230 1916 17.1 16.25 21.20 .

840 2.291 2.Rs Crores RESULTS FY 2006-07 FY 2007-08 Net Sales EBITDA Net Profit Capital Employed 19.387 56.316 4.013 7.266 .686 23.285 60.

9 3925.381 crores .1% 12. 2.In Rs-crores YEAR NET SALES EBIDTA PAT OPM EPS 2007-08 2008-09 2009-10 60013 13645 65963 3661 60722 10069 7291 483.1% 17.6 9.04 3.17 2008/09 includes non-cash unrealized derivative loss of around Rs.21 22.5 14.

especially for Novelis. mainly due to lower aluminum prices and softness in the Company‘s endmarkets in the first half of the year.722 crore.f from 01 Jan 2009 for the purpose of consolidation. from joint venture to associate w.e.  Further. change in the status of Idea Cellular Ltd. Consolidated revenues were lower at Rs. . also resulted in proportionate revenue from Idea not being included in the consolidated revenues. 60.

3.10. Profit before depreciation. .661crore in FY09.This includes USD 578 million of unrealised gains consisting of USD 504 million reversal of previously recognised losses upon settlement of derivatives and USD 74 million of unrealised gains relating to mark to market adjustments on metal and currency derivatives at Novelis. interest and taxes soared to a record level of Rs.069 crore from Rs. .

 Aluminium business revenue fell by 11% to Rs.425 crore to a profit of Rs.003 crore .12.5. This reflects steady improvements in operations across the board.48.998 crore. Earning before interest and tax turned around from a loss of Rs.575 crore and EBIT trebled from Rs. Copper business revenue increased by 13% to Rs.091 crore on the back of lower LME and lower demand in first half of the year.374 crore to 1.

. Overall results clearly reflect derisked business portfolio in terms of geographic and product mix.

offers Enormous growth potential especially In emerging markets .1 De-risked Operations owing to  Presence in multiple geographies  Costs and revenues in different currencies  Presence across the value chain 2 Hindalco Cost Advantage & Novelis Technology & customer base.

Hindalco Industries revealed that its consolidated net profit for the year ended March 2010. . The flagship company of Aditya Birla group. escalated sharply due to enhanced productivity at its Canadian subsidiary Novelis and accounting gains from preceding derivative dealings.

. This profit comprise of a non-cash gain of $578 million as well as an additional profit of $74 million from market amendments on metal and currency derivatives at Novelis. It had acquired Novelis in 2007 for an enterprise value of $ 6 billion.926 crore from Rs 484 crore a year-ago. Hindalco shared that it‘s for the fiscal year increased eight-fold to Rs 3.


the industries that require aluminium most include power (44%). Taiwan (10 kgs) and China (3 kgs). Japan (15 kgs). transportation (10-12%). . Though India's per capita consumption of aluminium stands too low (under 1 kg) comparing to the per capita consumptions of other countries like US & Europe (range from 25 to 30 kgs). In India. construction (17%) and packaging etc. consumer durables. the demand is growing gradually.


aluminium producers can be categorized into the following two types: Integrated producers/Primary producers: Integrated producers have presence right from the mining of bauxite (raw material) to producing aluminium ingots (finished product). Primary producers could either be a company that is just into mining of bauxite and alumina production or pure aluminium ingot manufacturing. which have restricted themselves from venturing into the downstream segment.  On basis of scale of operations and level of integration. For companies. Some companies may even go a step further and have downstream manufacturing facilities such as manufacturing of semi-fabricated products (foils). the user industries are basically the secondary producers .

. to name a few. The user industries for this segment would be the packaging industry (foils). which is in the form of aluminium ingots and billets. auto ancillary (wheels). Secondary producers: For this segment of producers. which are involved in the production of semi-fabricated products. the raw material is acquired from primary producers.

construction and engineering sectors. which are highvalue products and have higher margins. . Aluminium products can be classified under three categories. consumer durable. Rolled products find applications in automobiles. foils are used in the packaging sector. pipes and tubes that find usage in the electrical and the transportation sectors. Extrusions include bars. Finally.

It is a highly capital intensive sector (Rs 200 bn required for a 1 million tonne greenfield capacity expansion)  Fortunately. the advantage of having the 5th largest bauxite reserves in the world coupled with cheap and abundant labour helps the Indian companies to retain the distinction of being the lowest cost producers in the world. aluminium is a value-add commodity. .



Aluminum represents the second largest metals market in the world.  Growing demand for the lightweight metal is fuelled largely by the booming Chinese economy which already consumes a quarter of the world‘s aluminium production  China consume 36% of world‘s aluminium production as early as 2010  In addition. the EU is discussing the possibility of introducing stricter CO2 emission requirements for automobiles which will inevitably boost demand for aluminium  .

so its wider use in the automotive industry will make cars much more efficient  A kilo of aluminium. reduces gas consumption by 8.5 litres and produces 20 kg less CO2 emissions. . used as a substitute for heavier metals in car industry. Aluminium is lighter than steel. A 10% reduction of car weight results in a 9% increase of fuel consumption efficiency.

and the reduction of aluminium) in a highly efficient way can become leaders in the aluminium industry. yet. the situation is not as simple as it may seem. rising prices for substitute metals. consumers are wealthy. such as zinc and copper. the production of alumina. stimulate a direct increase of demand for aluminium in the power.  Demand is enormous.  .Finally. transportation and construction sectors in particular. Only those who can establish and manage the full production cycle (from the extraction of raw materials. profitability is evident: it seems a lot of companies should be rushing to enter the aluminium sector.

India). are not widespread throughout the world. the raw material for aluminium. The main deposits of high-quality bauxites with high aluminium content (not less than 50%). are already divided by the main players. Other companies have to either buy alumina on the free-market — and wholly depend on price movements — or join forces with deposit owners. China. Suriname). the Caribbean (Jamaica). the Mediterranean (Greece. . Resources of bauxites. South America (Brazil. Oceania and Southern Asia (Australia. Turkey) and the Urals (Russia). There are only seven bauxite-rich areas: Western and Central Africa (mostly. Guinea). Venezuela.

Guinea. One tonne of aluminium is produced from every two tonnes of alumina . Jamaica. it has nothing to do with clay or black soil but resembles a flour or very white sand. and India  Alumina — or aluminium oxide (Al2O3). is produced from extracted ore. Aluminium is mainly produced from bauxite. Brazil. Over 90% of the world‘s bauxite resources are concentrated on the tropical and subtropical belt in Australia. Despite its name. Surinam. Alumina is then transformed into aluminium through electrolytic reduction.

as well as earth silicon. First. the Bayer process is applied. ferrous oxide. Aluminium hydroxide is then extracted from this solution and calcined to produce pure alumina. To separate pure alumina. . Bauxite consist of 40-60% alumina. It is then cooled and a solid residue — «red mud» — is separated from the liquid. and titanium dioxide. the ore is heated in an autoclave with caustic soda.

During this process. and coal bars immersed in cryolite serve as anodes. It is based on the following principle: when the alumina solution is electrolyzed in molten cryolite (Na3AlF6). The final stage is the reduction of aluminium through the Hall-Heroult process. . The reduction cell bottom serves as a cathode. temperatures reach 950°C. considerably higher than the melting point of the metal itself. which is 660°C. pure aluminium is produced. Molten aluminium is deposited under a cryolite solution with 35% alumina.

which values Novelis at enterprise value of approximately US $6.4 billion of debt  This merger of Novelis into Hindalco will establish a global integrated aluminium producer with low-cost alumina and aluminium production facilities combined with high -end aluminium rolled product capabilities . The acquisition of Novelis by Hindalco was in an all-cash transaction.0 billion. including approximately US $2.

on account of low contract prices. In 2005. Novelis is a globally positioned organization.4 billion and net profit of US $90 million  The company reported net sales of US $7.4 billion and net loss of US $170 million in nine months during 2006. the company reported net sales of US $8. operating in 11 countries with approximately 12. .500 employees.

 By January 1. all the sales contracts will get expired and p r o f i t a b i l i t y will increase substantially from then onwards . 2010.

 After merger Hindalco will emerge as the biggest rolled aluminium products maker and fifth -largest integrated aluminium manufacturer in the world .

7 billion.770 kilotonnes in the previous year.2 billion reported in the same period a year ago. a decrease of 15 per cent compared to the USD 10. Adjusted EBITDA for the year was a record USD 754 million. These record operating results were primarily due to the Company‘s focus on cost reductions and restructuring initiatives . a result of lower aluminum prices and softness in the Company‘s end-markets in the first half ofthe year. a decrease of two percent compared to shipments of 2. Shipments of aluminium rolled products totalled 2.708 kilotonnes for fiscal 2010. representing a 55 per cent increase from adjusted EBITDA of USD 486 million posted for the same period a year ago. driven by softer end-market conditions in most of the regions during the first half of the year Net sales for fiscal 2010 were USD 8.

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