CASE STUDY II Profile of the Aluminium Industry aluminium is an important non-ferrous metal with intrinsic properties such as light weight, high strength to weight ratio, malleability, high corrosion resistance and good conductivity. Consequently the metal has a number of apptications. First and foremost it is used as a substitute tor copper in power ransmission systems. It is used in the manufacture of cable conductors, winding wires and strips, transformers, electric motors, fans, etc. Secondly aluminium is used as a substitute for wood in the manufacture of window frames, door panels, partitions and false ceilings. Given the light weight property, it Is used in the manufacture of bus bodies, components of automobiles, railway wagons and air crafts, Aluminium has by and large replaced copper conductors in power transmission systems. Aluminium alloy conductors are used for coastal electrification and railway electrification in the form of conductors and grooved contact wires. Aluminium in the form of sheets and foils is extensively used in the place of tin in packing containers, pharmaceutical strips etc. New applications for aluminium are also being found. For example, Galvalume, an aluminium based product is now being used in the place of galvanised steel for building panels, washers, refrigerators, etc. Al present, the electrical sector accounts for 47% of the aluminium consumption, households and consumer durables sector 16%, transportation B%, packaging 7%, construction 16% and miscellaneous 6%. The industry has grown at the rate of 7% p.a. during the late eighties and suffered a negative growth rate in the first two years of the nineties on account of the recessionary trends in many of the user industries. The alumina output of 5.13 lakh tonnes during 1991-92 represents just about 3.5 percent of the the world production. The per capita consumption of aluminium in india is just 400 gms as against 25 kgs. in the developed countries and 3 kgs. in developing countries such as Brazil. Likewise aluminium constitutes just 7% of the weight of automobiles in India as opposed to 30% in the developed countries. The international market for aluminium has also not been faring well in fecent years. While the gulf crisis of 1991 fed to a nse in the price of aluminium, the break down of the Soviet Union resulted in a flooding of the world market with aluminium (due to the drastic reduction in consumption ol aluminium by the defence sector of that country), The supply demand imbalance has been further compounded by the recession in the US automobile sector and the low economic growth rate in Japan and the westem parts of Europe. Industry analysts predict an annual growth rate ci 8% in the domestic demand for aluminium and an average annual growth rate of 3% in word demand. 117 Punefigh degree of capita: The aluminium industry 1S Of ¥ A a, Stag Toe au ti e010 Ce ene aur eae saat ot 700000 MT The Lepage eee Ree the One, ‘and India has the fifth large ‘ ae oh a - major input for thie dustry The conversion of alumuna iets pluminium ingots is particularly power ntensive, Past experience Nas shown that companies such as HINDALCO and NALCO which fave rates ao pally on captive power genoranan, IANS pedormed much better substannaly on ependent upen Supply of Bowe TOT enema! sources. For example. HINDALCO had 'o close do OS® dawn ts plant at Belgaum om account of the increase produce more ol alumina & consumes fess power. fe and distribution controls which were Aluminium was subject 10 pric vathdrawn in 1989. Aumninium extrusion have Desh subject to varying racle of excite duty. The advalorem excice duty WHC Was 89 high 23 suse in he savernes has been progressively reduced and is currenity istry expects a further reduction in excise hovering around 25%. The indu Guy and bebeves that a jower duly sinicture wil stimulsia comeste demand and exports. Table 103 . Key Financial Rates 1s power|__Alurninium | Corporate Sector | Particulars Bee te 89-90 90-91 91-92| 89-90 90.91 91-92, Debt/Net worth 099 095 128) 144 142 1.43 Current ratio 195 214 239) 211 212 211 Working capitay/Total 0.01 042 0.14 027 027 0.26 {assets Cash protivEquity 044 0.22 025 O91 1.05 1.07 |RONW (°%) 1263 802 6.31] 13.03 15.09 13.54 ROGE(%) | 1226 1040 937] 11.74 1240 12.45 linteresDebt (%) 965 925 7.16] 12.71 1280 13.48 Interest cover 380 9.22 322] 203 219 2.08) Average days of 43.00 48.00 55.00} 37.00 39.00 41.00 Financial goods _ | Source : CMIE Table 10.4 Profile of Hindalco Industries Limited lYear & Place of December 15,1958, | Incorporation Bombay |No. of equity 37,627 | shareholders | Pattern of shareholding Forsion 5.77% Institutions: 34.30% | Bodies corporate 35.10% | Directors. and their 0.44%) relatives ee | Top 50 shareholders. 182% | Others 22.90% tracing lot Equity 50 shares |Face value Fs10— : (Listing. Bombay, Calcutta, Delhi Hindalco Industries Limited, the flagship company of the Aditya Group is the largest integrated aluminium manufacturing company in the private corporate sector in India. The company commenced commercial production in 1962, at Renukeot in Uttar Pradesh with an installed capacity of 20000 1191 of an alumina plat ching capacity peimary ahuminien nd I begre u produce oe amrp000 tpa of alumninnurn, 300000 pa of a ‘i “ Caprested atumarnurn) Prout Hindateo producers of alurminiurn, thanks t which generates about 34 at Fenusaga MW of power, uring the year 1991-42 ut st dormed exceaaingly wet during lindaloo Industries has Pe ty a we ‘onnes of aluminiun tod a profit after tax OF f5.88 crores. During the ereiined marginally 10 1.63,485 tonnes due seerne company's wmover for 1002-03 was ind profit after tax increased to Fis 107 this period was AS.77 Crores aS Against i produced 1,66.197 t Ais.856 crores and po year 1992-93, its production to reduced availability of power the highest ever at Fis.976 crores crores. The export turnover during fis.24 crores for the previous year 1991-02 In 1993 the company has undertaken a major ‘expansion-cum-modernisation programme at @ cost of Fis.1000 crores and to part-inance this programme, the company has made a GDR issue of US $ 110 millon. Table 10.5 ; Financial Results for the year ending March 1993 Sales (Rs.cr,) Net Profit (scr) Dividend (%) EPS (As. P/E ratio |_ Equity (scr) Table 10.6 - Summarised Income Statements (Rs, in crores)Interest Pre-depreciation operating profit Depreciation Non-operating Sur/Det/Ad, | pat Provision for taxes Net profit Pre.dividend Equity dividend Retained _ profits Table 10.7 Particulars Current assets Cash & bank balances Sundry debtors Inventory Miso. current assets Fixed assets. (net) Mise, assets investment in subsidianes [Tora assets | Current abilities : | & advances j Sundry creditors | Pievision for taxation | Mi | For the period ending |_31.320'| 31.3.0 313.91 14.55 16.79 31.27 | 4324] 10012) 977a 11.35| 1095] 16.44 12.16 394) q943 44.05 | 93.11 | 100.42 | 31.45 | Saa1| 64.62 094) 075 075 6.69 | 6.69 10.67 2382, S697, 53.40 Summarised Balance Sheet 277.35 | 389.02 | 14.41 | 6.81 | = 82.84! “95.92 | 154.25 | 239.90 187.54 | 218.03 | - 227.03 o26| “087 6.37 4.00 ‘hoo; 4.00 376.84 | 499. a | 626.82 96.44) 79.38 100.25 12.07| 16.06 | \ 25.66 eo74| 97.34) o.cs 0.58 0.03 TAS 23.05) 2595} 23.50 CE eee eae eer 124 98.16 | 197.05 | 195.85 |_| 31.3.92 32.27 139.21 21.06 31.69 150.04 62.00 88.04 0.70 14.54 72.80 509.38 | 963 | 99.27 112.33 288.15 237.56 0.48 4.00 781.42 197.32 | 22.37.| 68.83 2.04 34.08As at | Paniculars 91.3.00' | 91.390 | 31.3.91 276.43 | 295.80 | 365. 31.3.92 3 191.60 Total liabilities 495.24 | 223.32 | 331.02 | 386.19 (Net worth ee een rmonths ata“ on ; Table 10.8 : Equity Data’ _ . es 7 =e 31391 | 31.392 Vass coded | siase | S185" 387,67,814| 387,67,614 shares | es eee | bs 16.53 22.53 | EPs (Rs.) | 17.09 So ail | 3.75 3.75) 2.75 3.00 DPS (Rs.) j igs j ‘Bie PIE ratio 14.25 6.75 15. j 3 Book value per 100.98: 122.32 84.10, 99.62 | share (Fs.) do 1s | Market value per share (Rs eee Magee { High 284.00, 32750! 417.30 660.00 tore —_i__ 72,50 | 155,00 |) 200.00)} 222.50 “for fifteen months The beta for the equity stock of the company is 0.93. Economic Analysis (relating to the Aluminium Industry) "(has been stated that aluminum is being increasingly used as a sovena [er Gone i ta power teneticcion systems, The goverment is the major "At present the construction sector accounts for 16% of the doen tne on ot aluminium. The level of activity in this sector depends Upon the growth in autonomous private and government investments. i, It is: stated that alumin of the weight of veloped countries. mobile industry wil! increase the automobiles, the demand tor aluminium willdepend upon the off take of automobiles which inturn is influenced by the economic growth rate, and cost and availabilty of credit, Therefore it is important to monitor growth rate in GNP, trends in industrial and consumer credit disbursements and trends in interest rates. v. Monitoring economic growth rates and business cycles in the deyeloped economies is important for the purpose of assessing the export potential of aluminium. industry Analysis — SWOT strengths Intrinsic properties such as light weight, high strength to weight ratio, corrosion resistance and good conductivity which make aluminium a better substitute for copper in power transmission; for wood in construction; and for tin in packaging. Abudant availability of bauxite in the country. Capital intensity of the aluminium industry which creates strong entry barriers. Favourable government policy which is evident from the govemment's decision to dismantle price and distribution controls in 1989 and by the progressive reduction in excise duty. Weaknesses The major end user industries of aluminium are cyclical and sensitive to changes in the monetary and fiscal polices of the government and changes in government expenditure. The international market for aluminium is characterized by frequent supply-demand imbalances caused by the changing economic and political conditions. This produces an uneven growth in the exports of the industry. Power intensity of the industry is a weakness given the erratic supply of Power from external sources. Opportunities Tremendous scope for finding new applications for aluminium - galvalume being one such application. Lower per capita consumption of aluminium than the per capita consumption of aluminum in developing and developed countries reveals the vast Untapped potential of the domestic market. Industries such as the automobile industry are likely to increase consumption of aluminium. Signs of economic revival in US and some of European economies bottoming out are bound to result in an upsurge in the intemational demand for aluminium. 123 Funds6 industry — tne output ¢ rease in pow w sdversaly attect eae ease in power saris wan OOTY AT gory oy retecat ma rower proation 9 See a nomic developments im tm Unanticipated poltical and econome MT s arena can adversely atfect the P ane yn the govern cia Unanticipated 208 Ine user expenditure; rec the domestic demand Company Analysis 1992 PBTNS 15.31% 14.95% 17.53% PAT/PBT 0.69 0.65 059 NS/TA 122 1.07 414 pe 2.24 1.89 1.95 AOE 28.87% __—_—*19.85% __ 22.99% Comments : The ROE during the period under review has fluctuated in the sense that it has declined from 28.87% in 1989.90 to 19.65% in 1990-91 and climbed upto 22.99% in 1991-92, The ROE has recovered during 1991-92 primarily on account of (i) a marked improvement in pre-tax profit margin. (ji) marginal improvements in the assets turnover ratio and (ii) marginal increase in leverage. The ROE would have been higher during 1991-92 had the profit retention ratio not declined. The decline in profit retention ratio can be explained by the slow growth in the net fixed asset investment during this period which would have resulted in lower depreciation tax shields. The fact that the company is embarking on a major expansion-cum-modernisation programme will result in higher depreciation tax shelters, lower the tax liabili id i co oe lity and increase the profit Growth : During the period under review, the company has been witnessing consistent growth rates in net Si (Compounded Annual Growth Ral 124is eamings. Ths poly has isk te company has an integrated Manufacturing facilty and has a captive wer plant which provide the Company an overall cost leadership. The company has also drawn up plans for modemisation and expansion which vil help the company to achieve the optimal economies of scale and gystain the low cost position, The growing export volumes indicates the company's commitment to break into the overseas markets, These factors together with the vast untapped potential in the domestic market favour investment in this company, Thus based on the financial and non-financial analyses, we recommend investment in the equity stock of Hindalco, Fun