Hindalco-novelis

Case study

Aditya Birla group
‡ A 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 Hewitt-Economic Times and Wall Street Journal Study 2007. ‡ Over 50 per cent of its revenues flow from its overseas operations

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

Hindalco is currently structured into two strategic businesses. aluminum and copper. ‡ market capitalization $4.3 billion. a $14 billion multinational conglomerate. with 2006 revenues of approximately $2.Hindalco ‡ Hindalco .6 billion.Profile . ‡ Established in 1958. a leader in Asia's aluminum and copper industries. and is the flagship company of the Aditya Birla Group. . with a market capitalization in excess of $23 billion.

Profile Novelis ‡ The Company operates in 11 countries.4 billion in 2005 revenue. ‡ Novelis has 33 operating plants and 3 research facilities in 11 countries.500 employees. and reported $8. across 4 continents . ‡ Novelis Inc is the world's leading producer of aluminum rolled products ‡ Novelis has manufacturing presence in 4 continents and has marketing presence worldwide. has approximately 12.

Profile Novelis .

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

To these four customers. . 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. Novelis was forced to sell its products at prices that were lower than raw material costs.Profile Novelis ‡ But the management took a wrong call on aluminium prices. In a bid to win more business from soft drink manufacturers. aluminium prices shot up 39 per cent (between 30 September 2005 and 2006).

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

should act as a natural hedge for LME-driven. volatile. flat rolled products in fast-growing markets such as India and China .STRATEGIC RATIONALE FOR ACQUISITION ‡ Immediate global reach and scale along with technological expertise ‡ Downstream business derives its margin through conversion mark-up. assets and expertise can be leveraged to grow high-valueadded. upstream commodity business ‡ Industry leading technology.

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

a prudent mix of Brownfield & Greenfield expansions Downstream growth through acquisition (Novelis) .STRATEGIC RATIONALE FOR ACQUISITION ‡ Upstream growth through organic route.

STRATEGIC RATIONALE FOR ACQUISITION ‡ Post acquisitions. aluminium is infinitely recyclable and recycling it requires only 5% of the energy needed to produce primary aluminium . the company will get a strong global footprint. 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. ‡ After full integration. As per aluminium characteristic.

Access to new set of customers ‡ ‡ ‡ ‡ ‡ ‡ Coca-cola Budweiser Ford GM Audi BMW .

VALUATION FOR ACQUISITION ‡ 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. ‡ Hindalco paid US $44. .93 a share for a lossmaking company ‡ Novelis share prices never crossed US $30 during 2005 and 2006.

‡ As per company details.5 times. Alcan trades at around 5.VALUATION FOR ACQUISITION ‡ The valuation for the enterprise value for the deal works out to around 11.8 times its 2006 EBITDA and Alcoa at 5. so considering the time required and replacement value.4 times the company s EBITDA. the replacement value of the Novelis is US $12 billion. the deal is worth for Hindalco. ‡ It would have taken a minimum 8-10 years to Hindalco for building these facilities. if Hindalco takes organically route. 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. Effectively. . ‡ The Tatas purchased 100 per cent of Corus equity for $12.1 billion of this is being raised by the Tatas. the Tatas paid only a third of the acquisition price. Only $4.FUNDING STRUCTURE FOR THE DEAL: ‡ 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.

85 billion (of the balance.6 billion worth of Novelis s equity.23:1. ‡ But that is not the case with Novelis. Hindalco is now borrowing almost $2. With a debtequity ratio of 7. it can t borrow any more. ‡ To buy the $3. $300 million is being raised as debt from group companies and $450 million is being mobilised from its cash reserves). .FUNDING STRUCTURE FOR THE DEAL: ‡ This was possible because Corus had relatively low debt on its balance sheet and was able to borrow more.

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

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

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9 17.hindalco net sales & Pat In Rs-crores YEAR 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 NET SALES 9523 11355 18313 19118 18220 19536 PAT 1329 1655 2564 2861 2230 1916 OPM 23.03 15.86 22.25 21.20 .1 16.

686 23.840 2.316 4.387 56.Consolidated Financial Highlights Rs Crores RESULTS FY 2006-07 FY 2007-08 Net Sales EBITDA Net Profit Capital Employed 19.266 .285 60.013 7.291 2.

381 crores .1% EPS 17. 2.9 3925.hindalco(Consolidated) net sales & Pat In Rs-crores YEAR 2007-08 2008-09 2009-10 NET SALES 60013 65963 60722 EBIDTA 13645 3661 10069 PAT 7291 483.21 22.1% 12.6 9.5 OPM 14.04 3.17 2008/09 includes non-cash unrealized derivative loss of around Rs.

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

This reflects steady improvements in operations across the board.425 crore to a profit of Rs.575 crore and EBIT trebled from Rs.374 crore to 1. Earning before interest and tax turned around from a loss of Rs.48. Copper business revenue increased by 13% to Rs.003 crore .998 crore.Consolidated Results ‡ Aluminium business revenue fell by 11% to Rs.12.5.091 crore on the back of lower LME and lower demand in first half of the year.

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

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