Unlicensed-capital budgeting


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Unlicensed-capital budgeting

  1. 1. Generated by Unregistered Batch DOC & DOCX Converter 2010.2.720.1415, please register! 2010 “CAPITAL BUDGETING” -: A PROJECT REPORT “Capital Budgeting Tools and analysis of Capital Expenditures in Hindalco Industries limited”. Arati pradhan ANSAL INSITIUTE OF TECHNOLOGY GURGAON 6/30/2010
  2. 2. A project report ON ―Capital Budgeting Tools and Analysis of CapitalExpenditures in Hindalco Industries Limited‖ Guided by: submitted by: Mr. Vimal Raheja Arati Pradhan Manger (finance & Accounts) MBA (finance)Hindalco Industries Limited Sem - 3rdAnsal Institiute of Technology,Gurgaon HINDALCO INDUSTRIES LIMITED Page 2
  3. 3. ACKNOWLEDGEMENT In an organization, be one man working in isolationcan achieve it an industry, a school, no outcomes. It’s always agroup working and achieving in totality. It is the outcome of all theguidance and support that I received from this organization. I would like to thank Mr. Ajay Joshi, Vice President(fin. and A/Cs) for giving me a chance to work with thisorganization and for extending words of encouragement andwisdom. I would like to thanks Mr. Vimal Raheja , Manager(Finance and Accounts). His valuable guidance and constantencouragement have helped me tremendously in the completionof this project. HINDALCO INDUSTRIES LIMITED Page 3
  4. 4. I would also like to extend a word of gratitude toMr.S.K.Das, General Manager (T &D) for having arranged mytraining in this organization. At last but not the least I would like to thanksmembers of the finance and Accounts department for makingavailable all resources required for the completion of this projectreport. To sum up, my experience with HINDALCO hasbeen a valuable one. The value addition was enormous and theimpact, long lasting. I thank everyone once again. HINDALCO INDUSTRIES LIMITED Page 4
  6. 6. The summer training is an integral part of curriculum. During the training, astudent Gets an opportunity to understand the Practical aspect of theory. Trainingmakes the concept clear. The project report is the outcome of the summer training that I have undergoneHindalco Industries Limited for the partial fulfillment of MBA programmer. The topic allotted by the company to me is“CAPITAL BUDGETING TOOLS AND ANALYSIS OFCAPITAL EXPENDITURES IN HINDALCO INDUSTRIESLIMITED.” I have tried my level best to make a good report. However, no onecan claim for Perfection entirely. So I apologize for the discrepancy, if any creptin. Preparation of project requires perseverance, initiatives, properguidance and direction. So it is mandatory to take the aid of various departments. Actually a project is a summarized form of the following seven activities: - Planning - Resource collection - Organizing - Joint efforts - Efficiency - Communication - Transparency DECLARATION HINDALCO INDUSTRIES LIMITED Page 6
  7. 7. I hereby declare that this project titled“CAPITAL BUDGETING TOOLS AND ANALYSIS OF CAPITALEXPENDITURES IN HINDALCO INDUSRIES LIMITED.” hasbeen conducted in the territory of hindalco industries Ltd.Renukoot, Sonebhadra. It is my own and original work. This is aproject report submitted in partial fulfillment of the degree courseof “MBA”. It has never been submitted not published anywhereelse before.The above statement is true to the best of my knowledge.DATE : Arati Pradhan MBA (FINANCE) Ansal institute of technology GURGAON HINDALCO INDUSTRIES LIMITED Page 7
  8. 8. TABLE OF CONTENTPART-a* Aditya Vikram Birla Group Overview* Introduction to Industry* Introduction to Hindalco* Business Outlook of Hindalco* Risk Management* Conclusion* Facts FilePart –B* Objective of the study* Research methodology* Project report and data analysis* Findings and suggestion* Limitation of the study* Conclusion* Bibliography HINDALCO INDUSTRIES LIMITED Page 8
  9. 9. GROUP OVERVIEW The Aditya Birla group is India‘s first trulymultinational corporation with global in vision and rooted in Indianvalues. The Group is driven by a performance ethic pegged onvalue creation for its multiple stakeholders. A us $ 29.2 billionconglomerate, with a market capitalization of us $ 25 billion. Anextraordinary force of 130,000 employees belonging to 30different nationalities anchors it. Over 50% of its revenue flow ofits operations across the world. The group‘s products andservices, offer distinctive consumer solutions. Its 72 state-of-the-art manufacturing units and sectoral service span throughout theIndia, Thailand, Indonesia, Egypt, Malaysia, Australia and china. OUR BRAND The name ―Aditya Birla‖ evokes all that is positive inbusiness and in life. It typifies integrity, quality, performance,perfection and above all, character. Our corporate logo, ‗TheRising sun‘, symbolizes these traits. (‗Aditya‘ is the Hindi word forsun). The logo consists of an inner circle, symbolizing theinternal universe of the Aditya Birla Group, an outer circle,symbolizing the external universe, and a dynamic meeting of raysconverging and diverging between the two. HINDALCO INDUSTRIES LIMITED Page 9
  10. 10. SALUTE TO THE SUN Aditya vandana, our Group‘s corporate anthem is asequel to our corporate logo. The beautiful sanskrit hymm extolsthe greatness of the sun and its never ending journey towardsexcellence. IN CUBATING TALENT Nurturing future leaders was of deep interest to ourfounder Aditya Vikram Birla .To commemorate his memory and tobuild on his legacy, we have instituted the Aditya Birlascholarships scheme. Under this scheme, some of the brightestscholars entering select Indian Institutes of Management ,IndianInstitues of Technology and Birla Institutes of Technology, pilaniare groomed to become outstanding leaders. OUR VISION “To actively contribute to the social and economicdevelopment of the communities in which we operate. In sodoing, bulid a better, sustainable way of life for the weakersections of society and raise the country’s humandevelopment index. ---Mrs. Rajashree Birla , chairperson, Aditya Birla centre forcommunity Initiatives and Rural Development. HINDALCO INDUSTRIES LIMITED Page 10
  11. 11. INCUBATING TALENT Nurturing future leaders was of deep interest to ourfounder Aditya vikram Birla. To commemorate his memory and tobuild on his legacy, we have instituted the Aditya birlascholarships scheme. Under this scheme, some of the brightestscholars entering select Indian Institues of technology and theBirla institute of technology, pilani are groomed to becomeoutstanding leaders. Our vision“ To actively contribute to the social and economic developmentof the communities in which we operarte.In so doing, build abetter, sustainable way of life for the weaker sections of societyand raise the country’s human development index.” --Mrs. Rajashree Birla,chairperson, Aditya Birla Centre forcommunity Initiatives and Rural development. HINDALCO INDUSTRIES LIMITED Page 11
  12. 12. GLOBAL VISION AND INDIAN VALUES The Aditya Birla Group is india‘s first multinationalcorporation. Global in vision,rooted in Indian values, the group isdriven by a performance ethic pegged on value creation for itsmultiple stakeholders. A us$29.2 bilion conglomerate, with amarket capitalization of us$14 bilion, it is anchored by anextraordinary force of 72,000 employees belonging to over 30different nationalities. Over 30% of its revenues flow from itsoperations across the world. The Group‘s produts and servicesoffer distinctive customer solutions. Its 72 state-of-artmanufacturing units and sectoral services span India.Thailand,Indonesia, Malaysia, Philippines, Egypt, Canada, australia, andchina. A premium conglomerate, the Aditya birla groupis a dominant player in all of the sectors in which it operates. Suchas viscose staple fibre, non- ferrous metals, cement, viscosefilament yarn branded apparel, carbon black , chemicals,fertilizers, sponge iron, insulators and financial services. HINDALCO INDUSTRIES LIMITED Page 12
  13. 13. OUR PRODUCTS AND BRANDSKEY BUSINESS OF THE GROUP:-SECTORS COMPANY UNITS IN INDIA AND OVERSEAS ATNon-ferrous Hindalco Renukoot-Alumina Refinery,metals Semelter and fabricated products. Silvassa- Foils,Alloy Wheels Renusagar-Thermal based captive Power Plant(Cpp) Hirakud-Smelter & Cpp Belgaum & Muri- Alumina Refineries Kalwa- Foils Belur, Taloja- Sheet rolling Alupuram- Extrusions Jharkhand, Chhatisgarh, Maharashtra Bauxite mines Dahej- Copper, di-ammonium phosphate and precious metals Birla Minerals Australia- Copper mines Pt.Ltd. Indal Kollur-Foil rolling HINDALCO INDUSTRIES LIMITED Page 13
  14. 14. Globally the aditya birla group is : >: A metals powerhouse, among the world‘s most cost-efficient aluminium and copper producers. Hindalco-Novelis is thelargest aluminium rolling company. It is one of the three biggestpoducers of primary aluminium in Asia, with the largest singlelocation copper smelter. >: No. 1 in viscose staple fibre. >: The 4th largest producer of insulators. >: The 4th largest producer of carbon black. >: The 11th largest cement producer globally, the 7th largest Inasia and the 2nd largest in India. >: Among the world‘s top 15 BPO companies and amongIndia‘s top four. >: Among the best energy efficient fertilizer plants. In India the Aditya Birla Group is:>: A premier branded garents player.>: The second largest player in viscose filament yarm. HINDALCO INDUSTRIES LIMITED Page 14
  15. 15. >: The second largest in the chlor-alkali sectors.>: Among the top five mobile telephony companies.>: A leading player in life insurance and assest management.>: Among the top three supermarket chains in the retailbusiness. Beyond Business—The Aditya Birla Group is>: Working in 3700 villages.>: Reaching out to seven million people annuallythrough the Aditya Birla centre for community initiativesand rural development, spearheaded by Mrs. RajashreeBirla.>: Focusing on healthcare, education, sustainablelivehood, infrastructure and espousing social causes.>: Running 41 schools and 18 hospitals.>: Transcending the conventional barriers of businessto send out a message that ―WE CARE‖. HINDALCO INDUSTRIES LIMITED Page 15
  16. 16. HINDALCO An industryleader in aluminium and copper, Hindalco Industries Limited, themetals flagship company of the Aditya Birla Group is the worldslargest aluminium rolling company and one of the biggestproducers of primary aluminium in Asia. A metals powerhousewith a turnover Rs 18856.30 crore. Its copper smelter is theworld‘s largest custom smelter at a single location. Established in 1958, we commissioned ouraluminium facility at Renukoot in eastern Uttar Pradesh, India in1962. Later acquisitions and mergers, with Indal, Birla Copperand the Nifty and Mt. Gordon copper mines in Australia,strengthened our position in value-added alumina, aluminium andcopper products. The growth story for Aditya Birla Group‘s flagshipcompany, Hindalco, will remain inherently Indian. After postingimpressive numbers, that saw its consolidated net profit soaringeight-fold to Rs 485 crore for the year ended March 31, Hindalco‘smanagement said they expect domestic demand to post a double-digit growth in the current financial year. However, the rise inNorth America and Europe will be modest. Global aluminium demands fell about 8 per centin 2009, after the global slowdown hit demand — especially forraw materials — in the automotive and construction sectors. But, HINDALCO INDUSTRIES LIMITED Page 16
  17. 17. there is a clear pickup, with demand likely to rise close to 14Percent in 2010, as China and India see rapid expansion in theireconomies. Aluminium demand in India is very positivebecause of auto, construction and power sectors. Even globally, Iwould be very surprised if aluminium prices come down from thecurrent levels,‖ managing director Debu Bhattacharya toldreporters. ―Copper demand, too, is rising on the back of powerprojects.‖ Hindalco gets about 40% of its India revenuefrom aluminium, and is trebling capacity in India to 1.9 milliontonnes by 2013 at a cost of about $5 billion. ―Financial closures ofall the three greenfield projects are on track. In fact, we haveinvested Rs 5,000crore already on the projects, as we arestrongly committed to them. We raised Rs 2,700crore from ourQIP to meet any shortfall in equity funding. As of now, I see norequirement for any more equity funding,‖ said Sunirmal Talukdar,group executive president & chief financial officer, Hindalco. Novelis , has seen a remarkable turnaround withits adjusted Ebitda (earnings before interest, depreciation, tax andamortisation) up 55 per cent in FY10 compared to the previousyear. The improved numbers and profitability have been a resultof right sizing operations and higher efficiency management andexploring new applications for Aluminium rolled product makerNovelis, which Hindalco acquired in 2007, will primarily seegrowth in the South American and Asian markets. Novelis will beinvesting $150 million in 2010-11 on capital expenditure.significant chunk of that will be going into expanding rolling HINDALCO INDUSTRIES LIMITED Page 17
  18. 18. operations in Brazil, which is likely to get completed by late2012.Aluminium in sectors like auto.Cost-saving exercises alsohelped. Novelis for example recycled 40 billion tonnes of usedbeverage cans (UBCs) in 2009, saving significant energy costs. Board of DirectorsNon-Executive directors:- Mr. kumar Mangalam Birla (Chairman) Mr. Rajashree Birla Mr. A.K. Agarwal Mr. E.B Desai Mr. S.S. Kothari Mr. C.M Maniar Mr. M.M Bhagat Mr. K.N. Bhandari Mr. N.J. Jhaveri EXECUTIVE DIRECTOR: Mr. D. Bhattacharya HINDALCO INDUSTRIES LIMITED Page 18
  19. 19. CHIEF FINANCIAL OFFICER: Mr. S. Talukdar, group executive president and CFOALUMINIUM BUSINESS: Mr. D.K.Kholly, chief operating officer (aluminium and powerrenukoot) Mr. S.M. Bhatia, president (foil and wheat) Mr. S.K.Mudgal, chief marketing officerCOPPER BUSINESS: Mr. B.M. Sharma, chief marketing officer Mr. J.P.Paliwal, joint Executive president Mr.N.M.Patnaik, joint president (finance and commercial)COMPANY SECRETARY: Mr. Anil Malik HINDALCO INDUSTRIES LIMITED Page 19
  20. 20. Hindalco overviewHistory of our company and other corporate mattersOur company is a flagship company of the Aditya Birla Group andwas incorpation on December 15, 1958 as Hindustan AluminiumCorporation Limited under the provisions of the Act. We changedour name from Hindustan Aluminium corporation Limited toHindalco Industries Limited on October 9,1989, as we hadexpanded our line of products and also proposed to diversify intoallied fields including aluminium foils, steel plant etc. The Equityshares of our company with face value of Rs.10 each were firstlisted of BSE. The listing agreement was signed with BSE onJanuary 28, 1960. Thereafter, the Equity Shares with Face valueof Rs.10 each were listed on the NSE. In 1962 we set up collaboration with KaiserAluminium and chemicals Corporation, USA when our integratedComplex at Renukoot came on stream with a smelter capacity of20,000 MTPA. It has since grown to become the largestintegrated aluminium producer in India with a smelting capacity ofRenusagar power company Ltd. The company has grown manifold and ismanaged by board of directors, with Mr. Kumar Mangalam Birlaas the chairman of the board of Directors. Day to day affairs of thecompany is managed by professional executives headed by MrRatan K. Shah as the chief Operating Officer. The dream of the visionary GD Birla to locatean aluminium plant near Rihand powerhouse comes true. The latePrime Minister, PT. JAWHERLAL NEHRU formally inauguratedthe plant in January 1963. Going round the extensive work, Panditji saw his dream of a brighter feature of India take shape before HINDALCO INDUSTRIES LIMITED Page 20
  21. 21. his eyes.From the modest beginning giant with a capacity toproduce 345000 tons of aluminium per annum.Aluminium and Power (Renukoot, U.P.) the company has salesand distribution network that covers all India and includes fivesales offices located in Mumbai, Delhi,Bangalore,Chennai,Uttarpradesh. Hindalco business Hindalco in India enjoys a leadership position inaluminium. The company‘s aluminium units across the countryencompass the entire gamut of operations from bauxite miningalumina refining, aluminium smelting to downstream rolling,extrusion, foils and alloy wheels , along with captive power plantsand coal mines. The company has significant market share in theentire segment in which it operates. It enjoys a domestic marketshare 42 % in primary aluminium, 63 %in rolled product , 20 % inextrusion,44%in foils and 31%in wheel. As step towards expanding the market for value addedproducts and sevices. Hindalco has launched sevelar brands inrecent years, which include Aura for Alloy wheel, fresh rapper forkitchen foil and ever last for roofing sheets. Our exclusiveshowroom, the aluminium gallery, seeks to promote Hindalco HINDALCO INDUSTRIES LIMITED Page 21
  22. 22. products to its customers. It is a platform for the company toshowcase quality audience in an appropriate ambience. Theexhibits include products to a quality audience in an appropriateambience. The exhibits include products like windows, doors,furniture, ladder, roofing sheets and ceiling and cladding panels. Hindalco products are well received not only inthe domestic markets, but also in the international market. Thecompany‘s metal is accepted for delivery under the high gradealuminium contract on the London Metal Exchange (LME). Thecompany export about 17% of its total sales volume of aluminum.The company‘s alumina chemical business is a leader inmanufacturing and marketing of specialty alumina and aluminahydrate products in the country. It has a market share of 90% inthe country. These specialty products find wide usage indiversified industries including water treatment chemicals,refractory, ceramics, cryolite, glass, filler and plastic, conveyorbelts and cables among others. The company also exports thesealumna chemical to over 30 country covering North American,Western, Europe and the Asian region.ALUMINIUM MANUFACTURING IN HINDALCO Hindalco was among the first few alloywheels companies to have obtained the ISO/TS 16949 HINDALCO INDUSTRIES LIMITED Page 22
  23. 23. certification to meet the stringent standard in specialty alumina,primary aluminium and downstream products. A part from being adominant player in the domestic market, Hindalco‘s products aswell accepted in international markets. Exports account for morethan 30% of total sales. Hindalco‘s major products include standardand specialty grade alumina and hydrates, aluminium ingots,billets,wire rods, flat rolled products, extrusions, foil and alloyswheels. Hindalco is the world‘s largest aluminium rolling companyand one of the biggest producers of primary aluminium in Asia. InIndia, Hindalco enjoys a ledership position in specialty alumina,primary aluminium and downstream products. Hindalco‘s major products include standardand specialty grade alumina and hydrates aluminium ingots,billets, wire rods, flat rolled products, extrusions, foil and alloywheels. The integrated facility at Renukoot (uttarpradesh) houses an alumina refinery and an aluminium smelteralong with facilities for production of semi-fabricated products,namely, redraw rods, flat rolled products and extrusions. Theplant is backed by a co-generation plant a 742 mw captivepowerplant at Renusagar to ensure continuous and consistentsupply of power for smelter and other operations.# UTKAL ALUMINA INTERNATIONAL LIMITED, ORISSA A Rs 44 billion( $1 billion) greenfield joint venture with Alcan Inc,of canada in which Hindalco holds 55% equity. The proposed 1.5million tonne alumina refinery is to be set up in Doragurha, HINDALCO INDUSTRIES LIMITED Page 23
  24. 24. Rayagada district of Orissa, sourcing bauxite from the richreserves of Baplimali Rayagada.# MADHYA PRADESHA Rs.77 billion($1.7 billion) project for a smelter-power complex inthe siddhi district of madhya pradesh Aluminium smelter capacityof 325,000 tpa supported by a 750 mw coal based captive powerplant. The coal for the power plant will be sourced from Mahancoal company Ltd., a joint venture between Hindalco and EssarGroup for mining of coal from the Mahan coal block.# JHARKHANDA Rs. 78 billion ($1.7 billion) project for a smelter- power complexin the latehar district. Aluminium smelter capacity of 325,000tpasupported by captive thermal power of 750 mw. HINDALCO INDUSTRIES LIMITED Page 24
  25. 25. Bauxite mines Power station E Extrusion plant s Alumina Smelter R Alumina Refinery R R s F R s W F F J s R s ECopper Aluminusmelter Foils Extrusio Alumina Rolling Wheels Bauxite Power Coal m,refinery plant n plant refinery mill plant mines station mines smelter& jetty s R B 24 s F E R W HINDALCO INDUSTRIES LIMITED Page 25
  26. 26. PRODUCTS PERFORMANCE REVIEW Hindalco is one of the leading producers of aluminiumand copper. Our aluminium units across the globe encompass the entiregamut of operations, from bauxite mining, alumina refining and aluminiumsmelting to downstream rolling, extrusions, foils, along with captive powerplants and coal mines. Our copper unit, Birla Copper, produces coppercathodes, continuous cast copper rods and other by-products, such asgold, silver and DAP fertilisers. Our units are ISO 9001:2000, ISO 14001:2004 andOHSAS 18001 certified. Several units have gone a step further with anintegrated management system (IMS), combining ISO 9001, ISO 14001and OHSAS 18001 into one business excellence model. We have beenaccorded the Star Trading House status in India. Hindalcos aluminiummetal is accepted for delivery under the High Grade Aluminium Contract onthe London Metal Exchange (LME). Our copper quality standards are alsointernationally recognised and registered on the LME with Grade Aaccreditation. Aluminium Hindalcos major products include standard andspeciality grade aluminas and hydrates, aluminium ingots, billets, wire rods,flat rolled products, extrusions and foil. HINDALCO INDUSTRIES LIMITED Page 26
  27. 27. The integrated facility at Renukoot houses an alumina refinery andan aluminium smelter, along with facilities for the production of semi-fabricated products, namely, redraw rods, flat rolled products andextrusions. The plant is backed by a co-generation power unit and a 742MW captive power plant at Renusagar to ensure the continuous supply ofpower for smelter and other operations. A strong presence across the value chain and synergiesbetween operations has given us a dominant share in the value-addedproducts market. As a step towards expanding the market for value-addedproducts and services, we have launched various brands in recent years —Everlast roofing sheets, Freshwrapp kitchen foil and Freshpakk semi-rigidcontainers. COPPER Birla Copper, Hindalco‘s copper unit, is located atDahej in Gujarat, India. The unit has the unique distinction of being thelargest single-location copper smelter in the world. The smelter uses state-of-the-art technology and has a capacity of 500,000 tpa.Birla Copper also produces precious metals, fertilisers and sulphuric andphosphoric acid. The unit has captive power plants for continuous powergeneration and a captive jetty to facilitate logistics and transportation.Birla Copper upholds its longstanding reputation for quality coppercathodes and continuous cast copper rods by assuring its management HINDALCO INDUSTRIES LIMITED Page 27
  28. 28. processes meet the highest standards. It has acquired certifications suchas ISO-9001:2000 (Quality Management Systems), ISO-14001:2004 (Environmental Management System) and OHSAS-18001:2007(Occupational Health and Safety Management Systems). Mines Hindalco acquired two Australian copper mines,Nifty and Mt. Gordon, in 2003. The Birla Nifty copper mine consists of anunderground mine, heap leach pads and a solvent extraction andelectrowinning (SXEW) processing plant, which produces copper cathode.The Mt. Gordon copper operation consists of an underground mine and acopper concentrate plant. Until recently, the operation produced coppercathode through the ferric leach process. In 2004, a copper concentrator wascommissioned to provide concentrate for use at Hindalcos operations inDahej. During FY2009, Mt. Gordon produced 17,815 tonnes of copper inconcentrate. Both Nifty and Mt. Gordon have a long-term life of mine off-take agreement with Hindalco for supply of copper concentrate to thecopper smelter at Dahej.Cornerstones of growth Our well-crafted growth and integration hinges on thethree cornerstones of cost competitiveness, quality and global reach. Weare also committed to the triple bottom line accountability of economic,environment and social factors. Care for the community around ouroperating units is best exemplified by our deep-rooted social commitment. HINDALCO INDUSTRIES LIMITED Page 28
  29. 29. Production profile The aluminium production process can becategorized into upstream and downstream activities. Theupstream process involves mining and refining of Bauxite toAlumina, while the downstream process involves smelting, castingand fabrication. HINDALCO is amongst the best plants in producingthe world class Aluminium at the lowest cost in India. The production of Aluminium is done in differentstages.Normally the stage consists of conversion of bauxite toalumina. Then alumina is converted into aluminium. The refineries at Hindalco are well established and cost worthly.They are veryefficient and wastage is very low. Hindalco refines bauxites primarily obtained fromcapative mines, to extract alumina,which is smelted into aluminaingots and are called billets.Hindalco smelts its entire productionof alumina into aluminium and does not engage in alumina trade. Production of Aluminium can be categorized intotwo stages:- # From Bauxite to Alumina # From Alumina to Aluminium HINDALCO INDUSTRIES LIMITED Page 29
  30. 30. Fully integrated operations - RenukootIndal synergies provide additional strength and operationalflexibility. HINDALCO INDUSTRIES LIMITED Page 30
  31. 31. Hindalco alumina refinery process Al2O3 (Alumina) to Reduction Plant HINDALCO INDUSTRIES LIMITED Page 31
  32. 32. Reduction plant – process flow chart HINDALCO INDUSTRIES LIMITED Page 32
  33. 33. Integrated Operations of Hindalco at Renukoot Bauxite MinesCo-Generation Alumina refinery caustic soda from joint ventrueRenusagar Aluminium smelter Aluminium Fluoride(power plant) from j.v. Semi fabrication plantRedrow Rod Mills Rolling Mills Extrusion presses Foils At. Wheel Plant HINDALCO INDUSTRIES LIMITED Page 33
  34. 34. Production Capacities Division Capacity LocationAlumina 1,160,000tpa 700,000tpa(Renukoot)chemicals 110,000 tpa (Muri) 350,000tpa(Belgaum)Primary 445,000tpa 345,000tpa(Renukoot)aluminium 2,000 tpa (Belgaum) 100,000tpa(Alupuram) 14,000tpa(Taloja)Extrusions 42,000tpa 30,000tpa(Renukoot) 12,000tpa(Alupuram)Rolled products 200,000tpa 80,000tpa(Renukoot) 45,000tpa(Belur) 45,000tpa (Taloja) 30,000tpa(Mouda)Wire Rods 64,000tpa 40,000tpa(Renukoot) 10,000tpa(Alupuram) 14,400tpa(Mouda)Aluminium foil 11,000tpa 5,000tpa(silvassa) 6,000tpa(kalwa)Aluminium 300,000pcs SilvassawheelsPower 1087.2mw 741.7mw(Renusagar) 78mw( Renukoot) 267.5mw(Hirakud)Copper 500,000tpa Dahejcathodes HINDALCO INDUSTRIES LIMITED Page 34
  35. 35. Vision mission and value “My objective has been to build a meritocracy…An organization is about people who make itAnd it would continue to be my focus” Kumar Mangalam Birla VisionTo be a premium metals major, global in size and reach, excelling in everything wedo, and creating value for its stakeholders. MissionTo relentlessly pursue the creation of superior shareholder value, by exceedingcustomer expectation profitably, unleashing employee potential, while being aresponsible corporate citizen, adhering to our values. Values Integrity: Honesty in every action. Path to excellence Commitment: On the foundation of integrity, doing whatever it takes to deliver,as promised.Passion: Missionary zeal arising out of an emotional engagement with work. Seamlessness: Thinking and working together across functional silos, hierarchylevels, businesses and geographies.Speed: Responding to stakeholders with a sense of urgency. HINDALCO INDUSTRIES LIMITED Page 35
  36. 36. Hindalco Today Aluminium has turned out to be the wondermetal of the industrialized world. No other single metal can do somany jobs, so well and so economically. Aluminium‘s growth rateis the highest amongst the major basic metals today. Hindalcoranks is the largest Aluminium producer in India, whose morethan 58% sale is in value added product and has more then 40%in total market share. The company‘s fully integrated aluminiumoperations consists of the mining of Bauxite, conversion ofBauxite, into alumina, production of primary aluminium fromalumina by electrolysis and production of properzi redraw rods,rolled products, extrusions and value added products like foil andwheels at silvassa. Hindalco‘s integrated operation andoperational efficiency have enabled the company to be one of theworld‘s lowest cost producers of aluminium. The company‘s costefficiency has helped it to record an outstanding performance inthe face of adverse market conditions. Hindalco also owns a largecaptive thermal power plant at Renusagar that meets the powerrequirement of the company very effectively. Hindalco currentlyhas aluminium capacity of 3,45,000 MTPA. Ever last, a hindalco brand for aluminium-roofing sheets, offers ideal and economical solutions for allroofing and cladding needs. Hindalco also offers colors-coatedand tiled roofing profiles. HINDALCO INDUSTRIES LIMITED Page 36
  37. 37. Business Performance ReviewThe company has recorded its best ever performance during thefiscal 2008-2009. Aluminium Copper Total Rs.Mn Rs.Mn Rs.MnNet sales and 7,600.54 10,619.11 18219.65operatingEBIT 1530.35 627.41 2157.76Capital 22728 10765 33493employedROCE(%) 9.04% Aluminium businessThe aluminium business demonstrated a stellar performance with # Highest ever alumina and primary aluminium production withover 100%capacity utilization at all operating units.# Highest ever turnover and business profit.# Highest ever EBIT margins at 50%. HINDALCO INDUSTRIES LIMITED Page 37
  38. 38. Financial Review and AnalysisHighlights (in Rs. Millions) Particulars FY 2008 FY 2009Net sales and operating revenues 192010 182200Total expenditure 157999 158140Operating profit 34011 30366Other income 4929 6369Interest 2806 3371Depreciation 5878 6454Profit before tax 30256 26903Extraordinary items --- ----Provision for current tax 6063 4781Provision for deferred tax 876 1214Provision for fringe benefits tax 114 113Profit after tax 28609 22303Operating margins 17.06% 16.66%Net Sales and Operating Revenues Net sales and operating revenues for the year 2008-09in increased by5% YOY on the back of higher aluminium volume, increasedVAP tonnage and buoyant prices for both the metals. A large increase innet sales and operating revenues was though negated by a sharp declinein US doller. HINDALCO INDUSTRIES LIMITED Page 38
  39. 39. Conslidated revenues jumped from Rs.19316 cores to Rs.60013cores, anincrease of 211%.This includes NOVELIS‘ sale for the 10.5 months from16th May, 07 to 31st March.FY09 will see incorporation of full-year NOVELISresults.Other income Other income at Rs 4929 million was higher by 33.2% over thelast year largely due to higher pre-tax treasury yield and higher averagetreasury.Interest The company‘s working capital requirement increasedsignificantly on account of. Higher copper prices driven by higher LME.Rising interest rates resulted in higher average cost of borrowing whichrose from 7.24% last year to 7.51% this year.Depreciation Depreciation charges were at Rs. 5878 in FY09 against Rs6380 millions in FY08.Taxes Effective tax rate went up to 26.8% to 23%on account ofincrease in pre-tax profit by 66% over last year and also proportion ofincome exempt from tax was lower in current year.Profit Net profit increased 12% to Rs 28609 million on account oftax adjustment for earlier year. Cash profit increased from Rs 32,024million to Rs 34,487 million. HINDALCO INDUSTRIES LIMITED Page 39
  40. 40. Cash flow analysis (In Rs.million) Particulars FY 2008 FY2009 % Source of cashCash from operating 2140 3171 23%Non-Operating Income 619 691 5%Net debt Inflows 964Equity Raised 2424 4426 32%Other treasury 5507 40%investment(net)Total 6147 13795 100%Application of cashNet capital Expenditure 888 967 7%Investment in subsidiaries 2970 11004 84%Other treasury 2124 193 2%investment(net) 668 669 5%Interest and finance charges --- 266 2%Dividend payoutTotal 6650 13099 100%Increase/(decrease)in cash (503) 696and cash Equivalents.Source of cashCash from operations Lower realizations for aluminium and lower TcRcin copper impacted margins, however cash profit was higher by8%. This coupled with higher working capital resulted in lowercash flow from operation compared to last year. HINDALCO INDUSTRIES LIMITED Page 40
  41. 41. Non-operating income Cash from non-operating income increased toRs.691crores as compared to Rs 620crores a year earlier. Theincrease is on account of higher dividend income and incomeearned on utilized lone funds which got capitalized.Equity Your company raised Rs4426crores(net ofissue expenses) from rights issue for take-out of the bridge loantaken for Novelis acquisition.Other treasury investment(net) Treasury investment were liquidated for take-outof the bridge loan take for Noveils acquisition. Application of cashCapital expenditure The company spent Rs.967crores on variousexpansion and efficiency improvement projects. Goingforwards,this amount is slated to rise considerably as per plannedinvestment are made in planned drownfield and greenfieldprojects. HINDALCO INDUSTRIES LIMITED Page 41
  42. 42. Investment in subsidiaries Aggregate invesments, including loans andadvances to subsidiaries, amounted to Rs11,004crores.yourcompany infused Rs.10400.37crores into AV mineral(netherlands)BV a SPV created for acquisition of Noveils Inc. and this amountwas used by AV Minerals(Netherlands) BV for takeout of thebridge loan taken for Noveils acquisition and servicing of debts onits balance sheet. Investment (Including loans and advances) inutkal alumina rose by rs.317crores.Interest Interest and finance charges paid for the year wasalmost same as in last year.interest charged to profit and lossaccount is only Rs.337crorenet of interest capitalized.Dividend Dividend paid including tax on dividend isRs266crores. We have put in place a permanent capital structure tosupport our strategic business plan. We successfully took out thebridge of us$3.03billion in November 2008 admist hostile andturbulent marco economic envirnoment. We managed to preserveour balance sheet strength to grow by reducing our leveragewhile doing so. HINDALCO INDUSTRIES LIMITED Page 42
  43. 43. RISK MANAGEMENT The company‘s management iscommited to furher strengthen its risk management capability inorder to project and enhance shareholder value. To that end, yourcompany has already undertaken an extensive risk managementeffort that includes building a profile of the key risks to yourcompany.This effort accomplishes the following goals: # Responds to the board and executive management‘s needfor enhanced risk information and improved governance # Provides the ability, manage and monitor the increasinglycomplex risk in the business: # Provides the explicit, comprehensives process to satisfythe regulators, and stakeholders, that significant risk are beingeffectively managed. This framework will continue to evolveand mature as risk management is implemented and experienceis gained. It will be reviewed and modified on a regular basis toensure its ongoing relevance and viability. The company is in commodity businessand therefore its revenues and consequently the profitability areexposed to volatility and cyclicality of commodity prices.Moreover, its revenues are directly and indirectly linked with HINDALCO INDUSTRIES LIMITED Page 43
  44. 44. Exchange rate of US-$/Indian-Rupee.The company also assumesinterest rate risk in course of its business.Commodity price risk management The company gets reference from quotationsof London Metals Exchange [LME] for its prices in domestic andinternationals markets. Consequently, the changes in the prices ofaluminium, copper,goldand silver significantly impact therevenues of the company. In accordance with its managementpolicy,company endeavuors to reduce to commodity price riskmovements by entering into hedging contracts. The principalobjectives of the activity are to reduce volatility of furture cashflows and to increase to visibility of furture revenues.Foreign exchange risk The company is exposed to foreignexchange risk due to imports of raw materials, capital goods andexports of finished goods. However, since company‘s revenues[both exports and domestic]are linked with US-$/Indian- Rupeeexhange rate,any volatility in the exchange rate may significantlyimpact the company‘s profitability. In order to hedge the risk, the companyuses various tools such as foreign currency borrowings, currencyforward and option contracts in accordance with its foreignexchange risk management policy.Interest rate risk The company borrows money from themarket to fund its working capital and expansion plans. These HINDALCO INDUSTRIES LIMITED Page 44
  45. 45. borrowings are exposed to interest rate risk. While most of thelong-term borrowings are at fixed rate, the short-term borrowingsare exposed to interest rate Changes every time new loans aredrawn. The company uses a combination of interest rate andcross currency swaps to manage the interest rate risk from time totime.Internal control system Strong internal controls and an MISsystem define roles and reponsibilties of people across variouslevles of the organization,enabling checks and controls and tightmonitoring on a continuous basis. All management decisions aresupported by well-defined and integrated MIS reports. The management and the auditors,internal and statutory, have detailed discussions from time to timeto identify key focus areas and to help the auditors prepare aneffective audit plan. Conclusion of companyThe company has recorded a strong performance despite thechallenging conditions in copper business posed by the fallingtariffs as well as production related issues. The success of its cost optimization initiatives at its power plant in hirakud as well ashigher operating margins that the company has achieved. The company has also made good progress on thestrategic growth projects that will propel it into the league of globalmajors. Efforts towards obtaining relevant approvals for theexpansions are moving at a fast pace. HINDALCO INDUSTRIES LIMITED Page 45
  46. 46. There have been significant developments duringthe year towards meeting the funding objectives of the same. Thestrong balance sheet, prudent financial practices as well asexpectations of improved operations give the confidence that yourcompany will be able to economically finance its growth plans. Onthe whole the companyis poised to deliver superior value to itsstakeholders on a continuing basis.OBJECTIVE This above report outlines the detailedguidelines,process flows and work steps related to the capitalexpenditure investment analysis process at HINDALCOINDUSTRIES LIMITED. HINDALCO INDUSTRIES LIMITED Page 46
  47. 47. Introduction To ProjectCapital Budgeting Tools and Analysis of CapitalExpenditures in Hindalco Industries Limited.Introduction HINDALCO INDUSTRIES LIMITED Page 47
  48. 48. Capital budgeting is afinancial procedure to ensure that capitalis allocated to value addingopportunities. A capitalbudgeting/investment proposal should beaccepted/rejected depending on whetherit generates, over the life of investment,returns more than its cost of capital. Theinvestment decisions of a firm aregenerally known as the capital budgeting,or capital expenditure decisions. A capitalbudgeting decision may be defined as thefirm’s decision to invest its current fundsmost efficently in the long-term assets inanticipation of an expected flow ofbenefits over a series of years. The long-term assets are those that affect thefirm’s operations beyond the one-yearperiod. The firm’s investment decisionswould generally include expansion,acquisition,modernisation andreplacement of the long-term assets. HINDALCO INDUSTRIES LIMITED Page 48
  49. 49. Sale of a division or business(divestment)is also as an investment decision. Capitalbudgeting is the process of evaluatingand selecting long-term investments thatare consistentwith the goal of shareholders (owner)wealth maximization.Capital Expenditure is an outlay of fundsthat is expected to produce benefits overa period of time exceeding one year.Features of investment decisions: # The exchange of current funds forfuture benefits. # The funds are invested in long-term assets. # The future benefits will occur tothe firmover a series of years.The key requirement for capital project evaluation are Access to the company’s requrimentfinancial return. # Knowledge of the company’srequirement financial return. HINDALCO INDUSTRIES LIMITED Page 49
  50. 50. # Realistic evaluation of the prospectivecash flow and profit impacts of profits. # Analysis of the costs and benefits ofproject with attention to the timing oftheir occurrence. # Evaluation by senior management of thestrategic of large projects. # A well- defined approval process. # Consistency with strategic planningand budgeting. # A review procedure.Investment decisions equire special attention because of the following reasons:Growth: The effects of investment decisionsextend into the future and have to beendured for a longer period than theconsequences of the current operatingexpenditure. A firm’s decision to invest inlong-term assets has a decisive influenceon the rate and direction of its growth.Risk: A long-term commitment of funds mayalso change the risk complexity of thefirm. If the adoption of an investment HINDALCO INDUSTRIES LIMITED Page 50
  51. 51. increases average gain but causesfrequent fluctuation in its earnings, thefirm will become more risky. Thus ,investment decisions shape the basischaracter of a firm.Funding: Investment decisions generallyinvolve large amount of funds,which makeit imperative for the firm to plan itsinvestment programmes very carefully andmake an advance arrangement forprocuring finances internally orexternally.Irreversibility: Most investment decisions areirreversible.it is difficult to find a marketfor such capital items once they have beenacquired. The firm will incur heavy lossesif such assets are scrapped.Complexity: Investment decisions are among thefirm’s most difficult decisions. They are anassessment of future events, which are difficult to predict. It is really a complexproblem to correctly estimate the futurecas flows of an investment. Economic,political, HINDALCO INDUSTRIES LIMITED Page 51
  52. 52. social, and technological forces causethe uncertainly in cashflow estimation.Types of investment decisions# Expansion of existing business# Expansion of new business# Replacement and ModernizationObjectives of the projectThe objectives of capital budgeting are asfollows: # Determines the economic viability ofnew investment opportunities to ensureeffective allocation of scarce financialresources.# Ensure consistency betweenprocedures for evaluating performanceand methods of analyzing projects. # Strengthen accountability for theperformance of new investments# Provide the basis for future plans. HINDALCO INDUSTRIES LIMITED Page 52
  53. 53. Type of the projectThe project is descriptive and analytical innatureSampling Plan:There has been no sampling plan as suchas the study involves understanding thevarious process and analyzing them. Thestudy involves the detailed analysis ofsecondary data collected from varioussources and therefore no sample sizeand plan has been considered.Data source:Data has been collected from bothprimary and secondary source.Primary source:Information gathered by interview anddiscussing with the employees of financedepartment and my project guide,Secondary source:Annual reports of past three years. HINDALCO INDUSTRIES LIMITED Page 53
  54. 54. Manuals of finance departmentInternal circulation bookletsInternet sites like www.google.com.,www.solidconey or @indiatimes.comData has been collected throughliterature survey includes the collectionof data from various sources likehandbooks. Studymaterials etc.Scope of study:The study has been conduted frominformation over a period of 3 years fromfinancial year2006/2007 to 2008/2009.Period of study:Period of study duing 25th may to 4thAugust2010.Assumptions:Year is taken of 360 days.All purchases have been taken as creditpurchases and all sales have been takenas credit sales. HINDALCO INDUSTRIES LIMITED Page 54
  55. 55. In the absence of relevant data the datafrom internet site is taken as the relevantinformation.Methods of quantative analysis: Calculation of capital decision Calcaulation of weighted average Costof capital Determining the debt –equity mix of thefirmUse of graphical presentations offinancialAnalysis:For the comparative analysis data wereused along with charts and necessarydiagram. Other than this different modelsare used to access the true financialposition of the firm. The current year i.e2010 has not been taken into calaculationbecause, at that time of preparation ofthis report annual closing accounting ofthe company was going on.Interpretation and recommendation: HINDALCO INDUSTRIES LIMITED Page 55
  56. 56. After completion of the entrie analysis,interpretation and recommendation weremade on the basis of figures anddiagrams. Statistical tools like tables,charts ,graphs used for representationof data.Capital budgeting procedures HINDALCO INDUSTRIES LIMITED Page 56
  57. 57. capital budgeting procedures are aimed at assessing aninvestment‘s ability to create for shareholders. Assessing aninvestment typically involves:A) estimating financial metiers that allow an insight into theexpected value creation by an investment.B) Performing risk analysis to evaluate distribution of potentialvalue that a project/ investment can create/ destroy. The capital expending required medical dispensary, fire fightingequipment etc. the various stages involved in the capitalbudgeting process can be outline as follows:-1 identification of investment proposals2 preliminary screening3 evaluation4 establishing priorities5 final approval6 implementation7 review1- Identification of investment proposals:- someinvestment projects are mandatory in mature whereas other are HINDALCO INDUSTRIES LIMITED Page 57
  58. 58. replacement decisions. In such, the identification is not difficult becausethe investment has to be made out of compulsion. If the law requires aneffluent treatment plant to be installed, there is no away out but to installit, similarly, if a machine has been worm out or become obsolete, it has tobe replaced but investment decisions like R&D, expansion anddiversification involve discretion and hence the need to identify profitableand strategically coherent investment project that get well with the excitingrisk profile of the firm. In such cases the management has to keep a vigilon the development- taking palce in the market and keep scouting foridea.2- Preliminary screening once the investment proposals havebeen identified, the next step is a preliminary screeing. This is importantbecause it is quite possible that some project may appear to be veryattractive but still may not be desirable because of so many reasons liketheir integration with the firm‘s existing portfolio of projects may bediffcult. At the same time if a less risky but profitable project wererejected, it would mean loss of any opportunity. So very care has to beexercised before accepting or rejecting a project preliminary screeninghelps assess the technical feasibility of the project, availability of resourcesand judge the adequacy of expected returns to compensate for the riskinvolved.3- Evaluation all the proposals, which pass through the preliminaryscreening process, are then analyzed in more detail. A detailed marketanalysis, technical analysis, technical analysis and financial analysisis thenundertaken to judge the profitability of the project. Projects are classifiedaccording to their nature. For example expansion projects, diversificationprojects etc.and ranked within each classification in terms of profitailityrisk and degree of urgency. There are many methods, which may be used HINDALCO INDUSTRIES LIMITED Page 58
  59. 59. for financial analysis such as payback period, rate of return method, netpresent value method etc.4- Establishing priorities once the project has been selected, thenext step would be prioritizing these projects. This is requried because itmay not be possible for the firm to invest immediately in all acceptableproposals and to establish priorities on the basis of urgency and expectedreturns.5- Final approval proposals finally recommended by thecommittee are sent to the top management along with a detailed report,both of capital expenditures and of sources of capital for final approval.The top management then calls a meeting where these proposals areexamined and the financial manager is asked to present several alternativecapital expenditure budgets for the recommended proposals. The topmanagement then finally selects some of the important proposals. Oncecapital expenditure proposals have been finally selected, funds areallocated to them. Projects are then sent to committee for incorporatingthem in the capital budget.6- Implementation once a capital expenditure budget has beenprepared and a proposal has been included in the budget, the next step isto requisite the authority to go ahead with the projet. Before suchauthorization, the capital expenditure committee may like to review the profitability of the project in the changed circumstances. If it is satisfied, itgives a green signal and work on the project can be stated without anydelay. Network techniques such as PERT and CPM can also be appiledto monitor the implementation of the projects. HINDALCO INDUSTRIES LIMITED Page 59
  60. 60. 7- Review last but not the least is the review of the projects, after it hasbeen fully implemented. The objective of this review is to evaluate theperformance of the project. The evaluation involve comparsion of actualexpenditure an project with the budgted ones, and the comparsion of theactual return from the investment with the anticipated return theunfavorable variance, if any should be looked into and the process of thesame be identify so that corrective may be taken in future.Financial evaluation criteriathe NPV of free cash flows/ PV of EVAs criterion is the undelyingprinciple to determine project/ business viability. However one shouldlook at other parameters for getting better understanding on risks andrewards associated with an investment. There are a number of financialmeasures that are frequently used to assess the viability of an investment,e.g. IRR, payback, profitability index etc. these measures cannot be usedin isolation and should be used along with other measures.forexample,the NPV of a project, derived through the discounted cash flowmethod, will tell you whether the project creates value or not, but will notindicate whether there are many years of negative value-creation followedby a few year of large, positive value creation, which go to make up thisNPV.NPV and NPV distribution of project in relation to alternatives The net present value of a project is theover arching criteria forevaluating an investment. NPV of a project is estimated as the presentvalue of all future cash flows minus the initial inestment requried.thistherefore measures the value creation by a project. The evaluation of aproject should include a comparison of NPV of the project and the HINDALCO INDUSTRIES LIMITED Page 60
  61. 61. project and that of its alternatives. The alternative with highest NPVshould be accepted. Even when the expected outcome of a project has anegative NPV, the project might not be abandoned where there areoverriding circumstances. While the NPV of a paricular project may benegative NPV because of overriding circumstances.NPV of a project is measured as( for a 4 years forecast period)NPV = CFo + CF1 + CF2 + CF3 + CF4 + TV - initial (1+C)0 (1+C)1 (1+C)2 (1+C)3 (1+C)4 (1+C)4 investmentNPV = EVAo + EVA1 + EVA2 + EVA3 + EVA4 + TV (1+C)0 (1+C)1 (1+C)2 (1+C)3 (1+C)4 (1+C)4Where,CF and EVA represent the free cash flow and EVA from the project in agiven year;‗C‘ represents the cost of capital for the project which will not be less thanthe business WACC, adjusted for additional risks attached with theproject depending upon the product profile, technology, financing mix,location of investment etc. and TV represent the value of cash flows froma project accruing after the forecast period(in this case 4 years) at the endof years 4. HINDALCO INDUSTRIES LIMITED Page 61
  62. 62. For larger and riskier projects both the NPV and the probabilitydistribution of the NPV should be compared with its alternatives, in termsof 1- The expected values, and 2- The probability of positive NPVInternal Rate of Return (IRR) IRR measures the return offered by a project on an averageover the life of the investment. IRR is therefore also that discount rate forwhich the NPV of the project is ZERO. IRR therefore can be measureusing the above NPV equation by finding that value of ‗c‘ for which NPVequals ZERO. All projects for which IRR> cost of capital create value forthe shareholders and those with IRR<cost of capital, destroy value. IRR isa measure of average return from the project and not that of total value.Due to this reason it can somethimes give conflicting signals from NPVwhen comparing alternatives.EVA and FCF profileEVA and free cash flow profiles for a project show the pattern of wealthcreation from a project. A comparison of two profiles can often yielduseful insights into source of value creation and project risk. Cash flowanalysis is also useful in financial planning. HINDALCO INDUSTRIES LIMITED Page 62
  63. 63. Eva vs FCF profiles can yield insights into a project‘s risk NPV(FCF)=50m PV(EVA)=50m 400 300 200 100 0 -100 -200 -300 -400 1999 2003 2007 2011 2015 2019 2023PV of FCF(for each period), PV of EVA based on cash taxes(for each yr.)Payback periodThe Payback period simply indicates by what time the cumulative cashinflows equal the cumulative cash outflows. HINDALCO INDUSTRIES LIMITED Page 63
  64. 64. This measure has two key failigsFirst, it does not account for the time value of money. In other words, ittreats a rupee in the first year as equivalent to a rupee in the third year(orany other year.)Second, it does not consideration the profile of cash flows beyond thepayback period. It is possible that a project which breaks even quickeryields very little cash subsequently. A competing project may have alonger payback period but may provide high cash flows subsequently.Years to discounted cash flow and EVA breakevenThe discounted payback is a refined version of the payback period. Itindicates by what time the cumulative discounted cash inflows equal thecumulative cash outflowsThe cumulative discounted cashflow breakevenpoint represents the years it takes for the initial investment to berecovered. At the cashflow breakeven point, the business would need tobe sold at a value above zero to recover initial investment. This tackles thefirst deficiency of payback period measure, discussed above, but is stillprone to the second problem.The cumulative discounted EVA breakeven point represents the years ittakes before value starts getting created. This is the period after which thecumulative discounted EVAs from the project become positive. At theEVA breakeven point, the business would need to be sold above bookvalue of capital to recover initial investment.The two profiles and breakeven point may be dissimilar. In general ashorter breakeven on cashflow and EVA is preferable, overall NPV beingthe same.Profitability index or NPV per rupee of capital HINDALCO INDUSTRIES LIMITED Page 64
  65. 65. Profitability index is measured asNPV of the project divided by the total amount of initial investment. Thistherefore measures the value created by the project for every rupeeinvested. This measure is useful for ranking projects for investments whenthere is a limited amount of money available to be invested. Rankingprojecs based on profitability index(PI) and investing money only inprojects with highest Pis, will result in maximum NPV on the limitedfunds available.Percentage of value in terminus The percentage of total NPV residing interminal value should be used to assess the proportion of value derivedfrom the ‗nearer‘ explicit forecast period. This is calculated as the ratio ofdiscounted terimal value to total NPV.Other measures The following measures should also be calculated for a project/investment and included in the capital budgeting proposalReturn on capital from the project in the initial few years. This ismeasured by the impact of earnings from project divided by total amountof capital invested.Return on assets from the project in the initial few years. This is measuredas PAT impact from project divided by total assets.The capital budgeting framework HINDALCO INDUSTRIES LIMITED Page 65
  66. 66. The investment analysis framework. The framework shows various stepsthat are required for estimating the financial metrics and generatingoutputs that are required for assessing the value creation potential ofa.project and therefore from the basis for accepting/ rejecting capitalproposals Each of these steps is detailed in subsequent chapters, whichcover the principles and methodlogies to be appiled for each of theanalysis.Identification forecasting cost of capital terminalOf alternative cashflows determination value computationNPV risk and capital requestComputation sensitivity analysis proposal preparation The capital budgeting process HINDALCO INDUSTRIES LIMITED Page 66
  67. 67. Step:1Identify alternatives:it is important to properly all available alternative when evaluating aproject proposal. The correct decision criteria for evaluation ofinvestment is to adopt the alternative that gives the highest NPV and notjust any project with a positive NPV among all mutually exclusivealternatives. In case where an action has to be taken and all availableoptions yield negative NPV, then the option that gives the least negativesNPV should be adopted.Guidelines for identification of alternativesA company typically faces multiple alternatives for any investment analysisdecision. At a broad level, a company has the option of investment invaried business and this choice should be based on strategicconsiderations.At a minimum, the NPV of the project should becompared with the NPV of the ―no go‖ alternative. Various alternativestothe project can be seen as opportunities foregone in accepting onecourse of action HINDALCO INDUSTRIES LIMITED Page 67
  68. 68. Figures: Identification of alternativeUndertake new project Status quoOutsource Invest in FacilitiesBuy Convert type technology/ location size Of Investment processes HINDALCO INDUSTRIES LIMITED Page 68
  69. 69. Acquire Greenfield project Brownfield projectGuidelines for evaluating alternatives:Use one of the two approaches-incremental and holistic approachAnyalternative should be evaluted based on their incremental impact on thecash flows of the firm. There are two broad approaches that can be usedwhen identifying the incremental value impact of a project/investment onthe value of a business/ company. The choice of approach depends onthe ease with which one can eastimate the value impact on the business/company. The following table describes situations under which either ofthe two approaches may be more useful.Incremental and holisticapproachBasis of Analysis Rationable Examples of Decision criteria projectsIncremental 1- It is easy to Setting up a NPV of project identify revenues greenfield plant cash flows and costs of the project 2- Project does not have company wide HINDALCO INDUSTRIES LIMITED Page 69
  70. 70. implicationsHolistic/company Project could Acquisition of a Compare NPVlevel affect other competing brand with and without revenues and the project expenses at the company levelIt is better to conduct an incremental analysis except when the project willhave company wide implications. In order to evaluate an investmentdecision basis, a base case must be clearly eastablished.Step :2Forecast cashflows for alternatives under consideration To forecast cash flows first forecast all the drivers of cashflowsthat will be impacted if the project is accepted. It is recmmended thatappropriate drivers for each parameterforecast be chosen based onindustry dynamics and project strategy. Where necessary prepare andforecast an intergrated income statement for the analysis. These driverswill from the basis for projecting the individual line items in thestatements and will also enable benchmarking and refinement ofassumptions.Forecast both revenues and costs in nominal terms explicitly statinginflation assumption for finished goods and various raw material item.This is useful as finished goods and raw material ites can have differentinflation rates. We will be using nominal WACC for discounting cashflows.These inflation rates may be best observed from historical trends andderived from expected demand- supply dynamics specific to the industry HINDALCO INDUSTRIES LIMITED Page 70
  71. 71. When either the costs or revenues are incurred/ received in a currencydifferent from domestic currency, use forward exchange rates forconverting projected costs/revenues in foreign currency intobase/domestic currency. Forward exchange rates can be obtained:Wherever possible and for the maximum duration available, prevailingforward exchange rates should be used in translating foreign currency cashflows to local currency.When evaluating investment in other countries :base currency used forprojecting cash flows should be consistent with the cost of capital estimate.All revenue, cost and capital items should be forecasted in the currency inwhich these are receivedor incurred and converted into base currencybefore esimating project cashflow/EVAs.When forecasting cash flows for investment in a cyclical business: The forecast can model the cyclicality into the foreasts as a base casescenario and making sure that the forecast period covers one full cycle.Given that cycle cannot be predicated with accurancy and both theduration of the cycle and the base trend line may change over time,forecast should use probabilistic scenarios for determining NPV asdiscussed in section on risk analysis. HINDALCO INDUSTRIES LIMITED Page 71
  72. 72. Step:3 Cost of capital Determination of cost of capital hindalco The term cost of capital is refferred to thediscount rate that is used in determining the present value of theestimated furture cash proceeds. The cost of capital is used asthe discount rate to claculate the NPV. It is the minimum rate ofretrun that a firm must earn on its investment for the market valueof the firm remain unchanged. The cost of capitalof the firm is thecomposition of several factors, which means that has its own costfirstly we calcaulate the specific cost of various components andthen and then we combine them to reach to the overall cost ofcapital of the firm, which is referred as weighted average cost ofcapital of the firm. Cost of Debentures: Cost of debt is the after tax cost of longterms fund through borrowings. The funds raised though debts isin the form of loans and debentures. Hindalco has both short-termand long-term. It also has current liabilities such has creditors. HINDALCO INDUSTRIES LIMITED Page 72
  73. 73. a. 6.39% Non convertible Debentures of rupees 1 crore each=100 crore shares.Tax rate= 22.3%IP= Interest payableT=Tax rateNP= Net ProceedsIP=10000000 x 6.39/100=639000639000(1-0.223)/1000000x100=639000(.0777)/ 10000000 x100=496503/10000000 x100=0.0496503 x100=4.96503%b. 6.50% NON convertible Debentrues of rupees 0.1 crore each=250 crore shares.Tax Rate= 22.3% HINDALCO INDUSTRIES LIMITED Page 73
  74. 74. IP= Interest payableT=Tax rateNP= Net ProceedsIP=10000000 x 6.50/100=65000 [65000(1-0.223)/10000000] x 100=65000(0.777)10000000 x 100=50505 /10000000 x 100= 5.0505%c. Loans and Borrowings Total loan taken by firm= 8324.29crore Total Interest = 669.65crore= [669.95(1-0.223)/8324.29] x 100= [669.95(0.777)/8324.29] x 100= 6.2534%d. Government of India Bonds HINDALCO INDUSTRIES LIMITED Page 74
  75. 75. Total GOI bonds= 2039crore Cost of Bonds= 8%Weighted Average cost of capital of Debt In CroresParticulars Total amt. propotion Cost Weighted cost 100 0.092 4.97% 0.45724Debentures(a) 250 0.0233 5.05% 0.118Debentures(b) 8324.29 0.777 6.25% 4.856Loans 2039 0.1903 8% 1.5224GOI Bonds 10713.29 100 6.954%Total So, the total weighted average cost of DEBT=6.954%COST OF PREFERRENCE SHARES The cost of preference capital is the annual preference sharedividend divided by the net proceeds from the sale of preferenceshares. Or we can say that it is the dividend expected by thepreference shareholders. Unlike interest payment on debt,dividend payable to preference share is not tax deductible. HINDALCO INDUSTRIES LIMITED Page 75
  76. 76. Number of shares=2032734shares @2Rs.Interest Rate= 6%Dividend on preference share= 0.02croreDividend tax on preference shares=0.01crorePD= Payable DividendNP=net proceedst=dividend taxKp= cost of preference sharePD= 2032734 X 6/100 =0.02croreDividend on one share= 2 X 6/100 =0.12Rs/shareNP/Share= 2 RsDividend Tax= 50%Kp=[0.12(1+0.50)/2]X 100=0.18/2 X100 HINDALCO INDUSTRIES LIMITED Page 76
  77. 77. =.09 X100= 9%Cost of equity sharesIt is the rate at which discount the expected dividends of the firmto determine its share value. When equity shareholders investtheir funds they also expect returns in the form of dividends. Themarket value of the shares is the function of the return that theshareholders may be expected and get. If the company does notmeet the requirement of the shareholders and pay dividends, itwill adversely affect the market value of the shares of thecompany.Cost of equity shares of firm Year Earning per share 1998-1999 7.16 1999-2000 7.74 2000-2001 8.57 2001-2002 8.67 2002-2003 5.92 2003-2004 8.53 2004-2005 5.92 2005-2006 8.67 2006-2007 8.57 2007-2008 7.74 2008-2009 7.16 HINDALCO INDUSTRIES LIMITED Page 77
  78. 78. Dividend growth modelAccording to this approach the cost of equity capital is calculatedon the basis of the required rate of return in terms of futuredividends to be paid on shares.The formula for calculating it, is as follows:Estimation of growth rateThere exist different methods for the estimation of growth rate ofthe firmInternal growthThis approach may be used when the firm has the stable dividendpolicy. Hindalco‘s payout ratio has fluctuated over the year. But ifwe see the past 10 years record of the firm we can say thatgenerally company distribute upto 20% of the total profit not morethan that. And retained 80%of the total profit. In 2006 companyretained 85% of the total profit.Growth may be calculated by calculating the product of retentionratio and ROEg=Retention ratio X ROE(year2009) =0.88 X 0.094 =8.272% HINDALCO INDUSTRIES LIMITED Page 78
  79. 79. Cost of equity taking into consideration internal growth rate as gD1 =1.35Po=55.75(As on 31st march)Cost of equity = 1.35/55.75+8.272 =10.69%Past average growthIn practice the growth may be based on past EPS rather thanDPS since companies do not change their DPS frequently withchanges in EPS. Thus DPS grows at a slower rate. The averageof EPS past growth rates may be used as a proxy for the futuregrowth. There are two alternatives available for calculating theaverage.The arithmetic average :- The arithmetic average EPS growth ratefor HINDALCO(1998-2009)= (7.74-7.16)/7.16+(8.57-7.74)/7.74+(8.67-8.57)/8.57+(5.92-8.67)/8.67+(8.53-5.92)/5.92+(13.48-8.53)/8.53+(16.79-13.48)/13.48+(25.52-16.79)/16.79+(22.23-25.520/25.52+(14.82-22.23)/22.23/10X100= (0.81+0.1072+0.012-0.317+0.441+0.58+0.25+0.5199-0.13-0.333)/10X100 HINDALCO INDUSTRIES LIMITED Page 79
  80. 80. = 1.211/10X100= 12.11%Cost of equity taking into consideration arithmetic average rate asg (growth)Cost of equity= 1.35/55.75+12.11 = 14.53%The geometric average: - The geometric average will give acompound average and is preferable when there is muchvariability in EPS data. The geometric average EPS growth for thepast 10 years is a follows.Formula (1+g)n=EPSn / EPSoWheren= Number of yearsEPSn=EPS of current yearEPSo= EPS of base yearEPSn=14.82EPSo= 7.74n=10 1+g=10√14.82/7.74 X100 1+g=10√1.92 g=1.0674 – 1 HINDALCO INDUSTRIES LIMITED Page 80
  81. 81. g= .0674 x100 g= 6.74%Cost of equity taking into consideration geometric rate as g(growth)Cost of equity = 1.35/ 55.75+6.75 = 9.16%Estimate of growth rate and cost of equity according to that: Method Growth rate Cost of equity Internal growth 8.272% 10.69% 12.11% 14.53%Arithmetic average 6.74% 9.16%Geometric averageGrowth rate and cost of equity of firmFor different growth rate HINDALCO‘s cost of equity is calculated.It varies from 15% to 10% so on an average we take 12% as thecost of equity of the firm. HINDALCO INDUSTRIES LIMITED Page 81
  82. 82. Cost of retained earningsThe companies do not generally the entire profits earned by themby way of dividends among their shareholders. They retain someprofits for the future expansion of the business. The amountretained by the company, if it had been distributed among theshareholders by way of dividends, would have given them someearnings. The company has deprived the shareholders of theseearnings by retaining the part of profit with it. Thus the cost ofretained earnings is the earnings forgone by the shareholders.Simply stated the opportunity cost of retained earnings may betaken as the cost of retained earnings. It is equal to the incomethat the shareholders can earn by placing these funds inalternative investments.Weighted average cost of capital of HINDALCOPARTICULAR TOTAL PROPORTI COST WEIGHTEDS AMOUNT ON COSTDebt 10713.29 0.310814 6.954 2.1614% %Preference 0.41 0.000012 9% 0.000108%Equity 170.027 0.0049 12% 0.0552%Retained 235384.69 0.68424 12% 8.21088%earningsTotal 34468.417 1.00 10.427588% HINDALCO INDUSTRIES LIMITED Page 82
  83. 83. Interpretationso, the weighted average cost of capital of the firm is 10.427588%so, on the basis of this we can say that, if HINDALCO isconsidering an investment project of average risk that has a samecapital budgeting as HINDALCO, then it can use 10.43% asdiscount rate to compute the project‘s NPV. Indifference pointThe EBIT level at which the EPS is the same for two alternativefinancial plans is referred to as point of indifference. Means thelevel of EBIT beyond which the benefit of financial leverage beginto operate with respect to earning per share. In operational termsif the expected level is to exceed the indifference level of EBIT,the use of fixed charge source of funds would be advantageousfrom the point of view of EPS i.e. the financial leverage isfavorable and leads to increase in the EPS level of theshareholders. If however the expected level of EBIT is less thanthe indifference point, then firm must use equity share capital.Formula:(X-I)(1-t)-Dp(1+Dt)/N1=(X-I)(1-t)-Dp(1+Dt)/N2Where, HINDALCO INDUSTRIES LIMITED Page 83
  84. 84. X= Earning per share at indifference pointI= The amount of interest on debtT= Tax rateDt= Tax on preference dividendDp= The amount of dividend on preference sharesN1= Number of equity shares outstanding (old+new)N2=Number of equity shares outstanding (old)Future investment decisions by HINDALCO The expansion programme of hindalcoindustries ltd, the flagship company of the Aditya Birla Group, ison track, the company management said at a recent pressconference in mumbai. The aluminium major has set a totalcapital expenditure programme of Rs 25000 crore till 2012, bywhich time its aluminium production capacity would have surgedto 17 lakh tpa from around 5 lakh tpa now. Hindalco had acquried canadian aluminiumproduct marker Novelis in 2007 for$ 5.9billion and has alsoannounced investment of $4 billion(Rs19800crore)over threeyears to expand capacity of India. Novelis has reported a net lossof $1.8 billion is the 3rd quarter ended 31 december 2008 onlargely to a goodwill loss of $1.5 billion, a fallout of the ongoingglobal meltdown. HINDALCO INDUSTRIES LIMITED Page 84
  85. 85. Now here as company had decided toraise 25000 crore rupees from the market. They can raise thismoney through any of the following options: # Company can raise 25000crore from the market in thefrom of equity share of Re 1 each.# company can raise money through debentrues @6.50% ofRs 1000000 each i.e. company is issuing 25000 debentures.Now the present capital structure of the firms is:Total equity share capital 170.027 crore.Dividend on preference share = 0.02croreDividend tax on dividend of pereference share=50%Total interest payment by the company to debt=669.65crore atthe tax rate of 22.3%Now on the basis of this we can calculate the point of indifferenceof the firm.Total number of new+ old equity share=(170.027+25000)crore =25170.027croreTotal interest on debt(old+new)= (669.65+1625)crore =2294.65crore HINDALCO INDUSTRIES LIMITED Page 85
  86. 86. Calculation:PLAN 1(X-669.65)(1-0.223)-0.02(1+.0.50)÷25170.027PLAN 2(X-2294.65)(1-0.223)-0.02(1+0.50) 170.027= (X-669.65)(0.777)-0.03÷25170.027=(X-2294.65)(0.777)-0.03÷170.027= 0.777X- 52.31805-0.03÷25170.027=0.777x-1782.92-0.03÷170.027= 0.777X-520.35÷25170.027 =0.777X-1782.97-170.027= 0.777X-520.35÷0.777X-1782.97=25170.027÷170.027= 0.777X-520.35÷0.777X-1782.97=148.036= 0.777X-520.35= 115.027X-0.777X= 63423.20÷114.24=X= 2305.88crore= X InterpretationNow here this shows that at 2305.88crore of EBIT there existindifference point. Mean at this point the EPS is same wether thecompany uses equity a its uses just for raising funds from themarket. if firm is expecting EBIT more than the level of HINDALCO INDUSTRIES LIMITED Page 86
  87. 87. indifference level them in such a case using plan 1 is morebenefical for the firm. Because the greater is the level of EBITthan the indifference point the stronger is the cause of usingleverged financial plan to maximize the EPS of the firm.Step:4 Risk analysisHaving estimated various metrics using the steps described inpervious sections, we now need to perform risk analysis tounderstand the potential upside/ downsides to value the potentialof a project from its base case. This section provides guidelinesfor and illustrates the use of risk analysis methodologies in capitalbudgeting decisions. A project‘s systematic risk is already captured through thediscount rate. The unsystematic risk can be dealt with byadjusting either the discount rate or the cash flow forecasts. It isrecommended that the latter approach be followed because 1-The correct factor which will adjust for the unsystematic risks inthe cost of capital is not easy to identify. 2-Having multiple discount rates within a company can be asource of confusion to operating managers.Risk analysis provides a means of estimating project value underdifferent sets of circumstances. it is way to evaluate uncertainty or HINDALCO INDUSTRIES LIMITED Page 87
  88. 88. risk. The adjustments to the forecast take place primarily in theNOPAT and capital projections and the terminal valueassumptions.The following approaches need to be used when performing riskanalysis and generating risk analysis outputs to be included in thecapital proposal.Approaches and applicability:There are three approaches to risk analysis that can be applieddepending on the degree of risk and capital requirements of theproject1-multifactor sensitivity analysis2-scenario analysis3-dynamic more carlo analysis Applicability of risk analysis approaches High Scenario Monte carlo probability Analysis Capital analysisExpenditure Multi-factor Scenario probability sensitivity analysis analysis Low Low Risk High HINDALCO INDUSTRIES LIMITED Page 88
  89. 89. Sensitivity analysis An alternative to point valuation is to develop arange of possible outcomes. A simple sensitivity analysis mayinvolve looking at specific variables and determining their impacton NPV, while keeping all other variables constant. This type ofanalysis can be depicted by a tornado chart and can be used onlyto highlight the major variables affecting a project‘s NPV but alsohelp determine which variables to focus on in conducting furtherrisk analysis.1-in order to identify sensitive variables,it is the project team‘sresponsibility to identify theranges for each operating and capitalinvestment item.the ranges should be based on benchmarksderived from project –specific technical estimates or ihistoricaldata or industry wide/analyst eastimates if available or marco-economic eastimates wherever possible2-the impact on NPV of varying an individual variable over itsrange is depicted through the tornado chart3-sensitive variables are defined as the top 4 variables whichimpact NPV the most. HINDALCO INDUSTRIES LIMITED Page 89
  90. 90. Figure : Tornado chart showing the sensitivity to PV(EVA) ofspecific project%change in NPV from base case due to +/-%change in variables-9% -6% -3% 0% 3% 6% 9%% variation from base case1-capex (-10%to 20%)(asset replacement)2-change in (1%to2%)selling price3-change in man- (3%to 0%)power costs4-change in raw material (10%to4%)Price5-terminal growth (-4%to4%)Scenario analysis HINDALCO INDUSTRIES LIMITED Page 90
  91. 91. Where required this improved method of dealing with uncertaintyshould be used. The method involves forecasting alternativesoutcomes and the likehood of each outcome.1-every outcome is constructed at the company level by choosinga particular value for every variable such that the set of all valuestaken together represents a real-would possibility. The valueschosen for each variable in an outcome should be consistent witheach other.2-at the minimum 3 scenarios should be constructed- downside,base and upside3- the NPV is calculated for each outcome4-the project team should assign probabilities for each outcomesuch that they add to 1. These probabilities should be based onjudgment5-the weighted average NPV of the various scenarios gives aprobabilistic estimate of the NPVIn addition to scenario analysis, decision tree analysis should beused for project1-involving significant uncertainities‘.2-where the funding commitments can be spread out over aperiod of time.Decision tree analysis process: HINDALCO INDUSTRIES LIMITED Page 91
  92. 92. Identify decision generate integrated layout strategic Points Scenarios ImplicationsCapital rationing and planningCapital rationing is required as the organizations have limitedresources. The rationing is therefore needed in such a mannerthat the incremental NPV from chosen investments/projects ismaximum.A limitation to ranking projects is that it must be done in a staticenvironment assuming all investment opportunities available forevaluation at the same time- this is rarely realistic.How to ration capitalTo rank projects, use profitability index (PI) defined as NPV ofproject/PV of capital invested during the life of the project.Projects should be ranked overall to maximize the total NPV. HINDALCO INDUSTRIES LIMITED Page 92
  93. 93. However, strategic reasons for implementing the project shouldalways be considered along with PI for final selection of theprojects.If two alternatives/projects have the same PI, a comparison ofdiscounted cash flow profile or the IRR should be used as asecondary evaluation measure.The capital budgeting process at Aditya BirlaGroupThere all investment proposals at Aditya birla Group business areclassified and also the level of analysis required for each of theseinvestments. The section also presents the standard outputs fromthe capital budgeting analysis that should be included in a capexproposal. HINDALCO INDUSTRIES LIMITED Page 93