Financial Analysis HINDALCO 2009


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Financial Analysis HINDALCO 2009

  1. 1. Institute of Rural Management, Anand Financial Statement Analysis of Hindalco Submitted To: Dr. K. N. Badhani Submitted By: Archit Gupta(P30067) Govind Rai(P30080) Mahima Shrimali(P30082) Nivedita Pandey ( P30089) 09
  2. 2. Acknowledgement We would like to express our deepest gratitude to our instructor Dr. K. N. Badhani for guiding us and helping us understand the fundamentals of Financial Accounting. This project has given us the opportunity to analyze the practical aspects of Financial Accounting and Management especially with respect to the Aluminum industry.
  3. 3. Synopsis The assigned project was focused on the detailed financial analysis of HINDALCO industries for the period of 2006-07 to 2007-08. The analysis was done using the annual reports and the official financial statements released by the company. The analysis contains following components: a) Environment, Industry, and Company (EIC) Analysis b) Industry Analysis using Porter’s Five forces c) Financial Statement Analysis: • Liquidity Ratios • Profitability Ratios • Solvency Ratios • Efficiency Ratios • Capital Market Ratios • Du-Pont Analysis • Trend Analysis
  4. 4. Environment Analysis Global Environment: The extraordinary financial crisis in the US has spread to Europe and Japan and is likely to see most developed economies suffering a prolonged period of recession that could extend beyond 2009 and according to some even beyond 2010. The financial crisis in the US started in the latter half of 2007, with the so-called sub-prime housing mortgage crisis. As is by now well established, the crisis had its real roots in hugely excessive leveraging by investment and commercial banks, under-pricing of risk and lack of necessary regulatory oversight. The busting of some of the big financial institutions has created an atmosphere of lack of confidence. This in turn has near completely clogged the flow of credit in the system. The banker’s adage that ‘it’s not the speed that kills, it’s the sudden stop’ fits the present precarious situation quite well. The impasse seen in the credit flow has had a direct impact on investment and consumption and has taken a massive toll of the real economy. The morphing of the ‘Wall Street crisis’ in to a historical ‘Main Street crisis’ has led to the majority of OECD economies sliding into deep recession. And it is not yet clear as to when the bottom of this recessionary slide will be reached. This causes a further loss of confidence. The enormity of the situation can be sensed by looking at some numbers. The IMF has re-estimated that the losses for financial institutions on account of US-based mortgage loans (the so called sub-prime loans) and securities may raise up to US$ 2.2 trillion (last estimate in October 2008 was US $ 1.4 trillion). The total funds made available by the US government and the Federal Reserve so far under the various rescue programs have already amounted to a whopping US$ 7.5 trillion or more. In addition, the loss of market capitalization can be gauged from the sharp fall in stock market prices both in mature and emerging economies. The loss of wealth this represents is bound to adversely impact global demand for a prolonged period. This year in the Forbes list of billionaires the total wealth registered was 2.4 trillion U.S. dollars, down from 4.4 trillion last year, reducing more than 45 per cent and marking the worst reading since Forbes began compiling the list.
  5. 5. This acute financial crisis resulted in a sharp slowdown of global GDP growth rate (Refer Figure above). The acuteness, unpredictability and speed of the economic downturn can be gauged by the frequent downgrading of forecasts by the IMF. An IMF assessment in early November 2008 has projected that the world output would grow by 2.2 per cent in 2009 as compared to 3.4 per cent in 2008 and 5.2 per cent in 2007. This has been revised in January 2009 to as low as 0.5 per cent and there is talk of the global GDP actually contracting in 2009 if major emerging economies are unable to compensate for the massive loss of external demand. Projections by the IMF in November 2008 for advanced economies had estimated a contraction of around 0.3 per cent in 2009. This has been revised downwards in January 2009 to around 2.0 per cent. This is the first annual contraction for developed economies taken together since World War II. The World Bank had projected in early December 2008 that world trade will contract by 2.1 per cent in 2009, the first time since 1982. The IMF in January 2009 has revised it downwards to 2.8 per cent. The decline in exports in some major economies in the third and fourth quarters of 2008 has been simply stunning. In January 2009, exports fell sharply in Japan by 46.3 per cent, in Germany by 20.7 per cent, China by 17.5 per cent, in India by 15.9 per cent and in UK by 6.7 per cent.
  6. 6. While some major emerging economies like China and India escaped the negative impact of the financial meltdown on their banking sector, any hopes that their real economies have decoupled from the developed market economies have been quickly belied. These economies are now experiencing a sharp downturn in their GDP growth rates. The IMF in January 2009 lowered its projections of GDP growth in 2009 for both India and China to 5.1 and 6.7 per cent respectively. This is a sharp slowdown in GDP growth for both these giant emerging economies compared to the past five years. The contagion of this financial crisis has now spread to countries in Asia as the export markets of these countries have virtually collapsed. Exports in major Asian economies have declined by huge amounts. Japan and Taiwan saw a fall in exports of around 35 per cent and 40 per cent respectively in their exports in December 2008. The fallout from a major slowdown in Chinese exports and its GDP growth on South East economies and indeed the rest of the world can be severe and has yet to be factored in to the estimates of global growth for 2009 and 2010. Along with exports, industries in the region have also been affected as can be seen in the shocking contraction of Taiwan’s industrial production of around 32 per cent in December 2008. The severity of the economic downturn has shocked all observers and the end is not yet in sight. The latest forecast by Nouriel Roubini, the NYU professor, who had warned of the crisis ahead of all
  7. 7. others, is that world GDP will start to recover only toward the end of 2010. Thus, we have to reckon with another one and half years of weak global economic activity and perhaps a further shrinking of world trade. The scale of this global financial crisis and the subsequent economic downturn across the world has made it one of the truly global crises that the world has ever seen. But the pattern and the characteristics of the crisis expectedly have some precedence. In a study on the scale and duration of financial crises, Reinhart and Rogoff (2008) found that financial crises are protracted episodes and the asset market collapses due to them are deep and prolonged. Many of the financial crises have been seen to be preceded by bubbles in the housing market and huge bullish rally in the stock markets. In their study they found that on an average real housing prices declined by 35 per cent over six years and the stock prices collapses average around 55 per cent recovering back to normal in more than three years. Apart from the impact on asset classes they found that the crises have huge impacts on the real economy as well. In terms of unemployment they found that the average slump to be around 7 per cent with recovery normally seen in four years. In regard to real GDP per capita they found that the contraction on average is around 9 per cent with an average two year recovery period. These results are important to note both for getting some understanding of how the global economic downturn might unfold in the coming months and also for understanding the impact of the crisis on the future outlook for the Indian economy.
  8. 8. Country Outlook Using an averaging process of past crises we try to see the impact of the present global crisis on the nature, severity and duration of the economic downturn in India. The past crises that have been considered are the three major crises – 1991-92 balance of payment (BOP) crisis; 1997-98 fallout from the Asian financial crisis; and 2000-02 crisis caused by the worldwide bursting of the dotcom bubble and 9/11 incident. Quite expectedly, the sequencing of the crisis and the transmission mechanism are different in developed and developing economies. In the developed world the crisis originated in the financial sector and then impacted the real economy. The Swedish and Norwegian crises of the nineties and the present crisis in the US followed this sequence. For developing economies in the current crisis the causality and sequencing generally runs the other way, with the real sector being hit first and the financial sector thereafter. The pattern was of course different in the Asian financial crisis of the later nineties when the crisis also originated in the financial sectors of Asian economies. In line with this trend, in each of the cases of external shock, the real sector of the Indian economy has been initially impacted by the crisis as its banks are considered safe and
  9. 9. robust. Exports and foreign trade overall have been the first to be impacted and act as the channel for the external crisis to be transmitted to the Indian economy. The chart below shows the average of annual exports growth rates during the three major crises that India has suffered since the end of eighties. The period selected is three years prior to and three years after the worst year of the crisis. In the past crises we find that export growth slumped by 12 percentage points during the crises period. But the export sector recovered in just one year after the slump in all the three major crises. The sudden recovery of exports can be due to the huge depreciation that is seen during the crises period. On the other hand if we look at the imports we find that the slump is for a longer duration. As can be seen from Fig. b, import growth starts falling two years prior to the crises. The fall in import growth in the three major crises is greater than the fall seen in export growth. Import growth fell at an average of 14 percentage points and recovery also takes longer than for exports. The sharp depreciation during the crisis period makes the imports more expensive, hence, leading to their prolonged slump. The recovery in the case of imports is longer of a period of two years as compared to just one year in the case of exports. During the present crisis, the growth in exports and imports has started declining in September and October 2008 respectively. In the earlier crises the manufacturing sector also was negatively impacted. For
  10. 10. example during the BOP crisis of 1991-92, the index of industrial production (IIP) grew at just 0.6 per cent. Industrial production has also weakened during the present downturn. IIP growth for the period, October to December 2008, averaged 0.4 per cent. In the month of January 2009, IIP registered a negative growth of around -0.5 per cent. As can be seen from the average of past crises, IIP growth in the peak year of the crises has fallen by an average of 3 percentage points, year on year (Fig. a). In Indian banks did not have any direct exposure to mortgage-based securities, their off- sheet activities were quite limited and nothing of the sort of securitization that was seen in the US was present here. Finally, in the case GDP growth we find it falling by about 3 percentage points during the peak crises year (Fig. b). Indian Economy: Recent Developments India had been growing robustly at an annual average rate of 8.8 per cent for the past five years (2003-04 to 2007-08). This was higher than the potential growth rate of output as estimated both by the IMF and OECD. The strong Indian growth story, based on its structural strengths of a young population, skilled manpower, rising savings and investment rates, large unfulfilled domestic demand and globally competitive firms attracted significant investor attention in recent years. Analysts have predicted that by the year 2025, India would be the third largest economy in the world after China and the US. Recent high rates of economic growth have been the result of high levels of
  11. 11. investment, rise in productivity supported by technological up-gradation and greater integration with global flows of trade, finance and technology. Fears of over-heating of the economy prompted the Reserve Bank of India (RBI) to begin monetary tightening as early as September 2004 when the cash-reserve ratio (CRR) for commercial banks was raised. The sharp increase in global fuel and food prices in the first quarter of 2008 aggravated inflationary concerns and resulted in further monetary tightening that saw interest rates being hiked until August 2008. This was clearly a case of policy running behind the curve and consequently over-compensating in its attempt to weaken inflationary expectations. Expectedly, this amount of monetary contraction resulted in a slowing down of the economy with the GDP growth coming down to 7.8 per cent during April-September 2008 from 9.3 per cent in the same period of 2007. The global financial sector meltdown precipitated by the collapse of Lehman Brothers in September 2008 and the subsequent virtual nationalization of AIG, the world largest insurance company, impacted India at a time when the economy was already in the midst of a cyclical slowdown. The immediate transmission of the financial crisis to India was through a cessation of credit flows which was reflected in the spiking of overnight call money rates that rose to nearly 20 per cent in October and early November 2008. Spooked by market rumors and some circumstantial evidence, depositors sought safety by shifting their deposits away from private banks to large public sector banks as reflected in the State Bank of India (SBI) seeing an increase in deposits of more than Rs. 1000 Crore per day during that period. Foreign institutional investors (FIIs) withdrew from the Indian markets to provide the much-needed liquidity to their parents in the US or Europe. This resulted in a net repatriation of about $ 13 billion by the FIIs in 2008 on account of equity disinvestment though small has resulted in a sharp decline in equity prices and market capitalization. Besides, there had been large-scale redemption of holdings with mutual funds which put further pressure on liquidity. Thus, while the Indian banking sector remained largely unscathed by the global financial crisis, it
  12. 12. could not escape a liquidity crisis and a credit crunch. This in turn has had its impact on investment and consumption and the real economy. Thus, the present global crisis has already begun affecting the Indian economy. With the sharp fall in oil and other commodity prices, inflation fears have receded. The year- on-year inflation rate has already come down to 2.4 per cent in the week ended 28th February 2009 from the peak of 12.9 per cent for the week ended 2nd August 2008. The GDP growth rate for 2009 is expected to be between 5.6 -6.9 %.
  13. 13. Policy trends Global Integration Indian economy has become much more integrated with the world economy now than the pre-reform period. Liberalization in industry, investment, foreign trade, financial sector and capital flows that was undertaken after the balance of payment crisis in early 1990s led to India becoming well integrated with the world economy. Total trade flows (receipts and payments on merchandise and invisibles), as a proportion of GDP, rose from 20 per cent to 53 per cent during the period 1990-91 to 2007-08. Capital flows (inflows plus outflows) had been just 12 per cent of GDP in 1990-91, and in 2007-08 they rose to 64 per cent of GDP. With the increased linkage with the world economy, India cannot remain immune to the global crisis. India began to feel the impact of the crisis in
  14. 14. January 2008 when the BSE sensex collapsed after crossing the peak of 20800 in early January 2008. Basically there are three channels through which India is affected by the global crisis: (i) financial markets, (ii) trade and (iii) exchange rate. The financial channel has been operating in India largely through the equity or portfolio flows. The outstanding FII equity investments at the end of December 2007 had been about US$ 66 billion and by 13th March 2009 they have fallen to US$ 51 billion. This is due to the US and European financial institutions which are undergoing a historically unprecedented “deleveraging” process. The IMF has estimated that the US and the European banks alone are to downsize their assets by about US$ 10 trillion in 2009. This will involve massive disinvestment from the emerging markets continuing this year. FII equity outflows are just one part of outflows from India. Indian banks and corporates have been unable to borrow from abroad as there is a complete freeze of the financial system in the US and Europe. Instead, they had to send funds from India to provide for the necessary liquidity in their operations abroad as foreign banks were unable to meet their requirements. Moreover, trade financing by foreign banks also practically dried up and Indian banks had to substitute for that as well. With the crashing of global and domestic stock markets, the primary issue market also dried up in India. All this led to a huge liquidity and credit squeeze in India during September-October 2008. The trade channel has worked negatively with the collapse of global demand for Indian exports, both merchandise and services. As a result, growth in India’s exports slowed down sharply in September 2008 and turned negative from October onwards. Merchandize exports have been growing at 29 per cent till September 2008. Software exports grew by 22 per cent in H1 2008-09 and remittances by 49 per cent. They are likely to experience sharp declines in the second half for which data is not yet available. A 10 per cent decline in the growth of export of goods and services could bring down the GDP growth significantly.
  15. 15. The rupee has been depreciating since January 2008 as a direct result of the huge reverse flow of capital out of India. From an average Rs. 40.36 per US dollar in March 2008 it fell to an average of Rs. 49.00 in November 2008, depreciation of about 18 per cent and further to nearly Rs 52 at the beginning of March 2009. This is a decline of 22 per cent over the same month in 2008. Depreciation is good for Indian exports but it will have adverse effects on corporates who borrowed abroad and will raise the cost of external debt servicing. Outstanding commercial borrowing at end-March 2008 had been US$ 62 billion. On the capital account, there could be a nominal surplus of less than 1 per cent of GDP as compared to huge surpluses in earlier years. Foreign reserves will be drawn down to the extent of US$ 16 billion (including valuation changes) against an accretion of US$ 92 billion last year. This will imply a change of more than $100 billion or nearly 10% of GDP in the BOP comfort level of the economy. This may have an adverse impact on investor perception and also on our own ability to handle a further weakening of our service and merchandize exports. There is thus an urgent need for focusing on measures to push exports. Investment Environment: Despite India’s foreign investment policy allowing 100% FDI in most sectors, India has thus far failed to reach its full potential as a destination for FDI. The government’s attempts at increasing FDI inflows have been hampered by the several impediments including pervasive corruption, an unwieldy bureaucracy, and a significant deficit in critical infrastructure. India is known for diverse operating environments with regulations varying from state to state. Significant reform in investment-related matters, particularly regarding foreign investment, was delayed over the past few years largely due to the UPA’s reliance on India’s communist parties for support in parliament. The
  16. 16. ending of this support in 2008 enabled limited reforms to be passed. For example, in February, the government initiated changes that further opened- up certain sectors such as insurance, telecom and retail, to FDI. The government’s move didn’t alter the FDI caps in place in these sectors but instead permitted foreign equity investments beyond the limit to occur indirectly. One expectation is that the re-elected UPA government, that no longer relies on India’s main leftist parties for support, will now be in a position to push through further economic and investment reforms, many of which will provide opportunities for foreign investors. The reform agenda is likely to be moved forward but probably at a gradual pace, particularly given the present state of the global economy as well as the diversity of views on these issues, even within the Congress party itself. Policy Response to the Economic Slowdown Monetary Policy Measures Before the spread of the global crisis, rising inflation was one major downside risk for the Indian economy. But the fall of prices of oil and other commodities and overall fall in demand as a result of recession in major developed countries has pushed down the rate of inflation in India. Inflation measured by the wholesale price index (WPI) had peaked at 12.9 per cent in early August 2008 and has been coming down since then. WPI inflation dropped to 4.4 per cent by 31st January 2009 and just 2.4 per cent as on 28th February 2009. Monetary policy shifted gear and became expansionary from October after the scale of the US financial sector meltdown and its likely adverse effects on the Indian economy became evident. The policy focus has shifted from containing inflation to promoting growth. The RBI thus acted with considerable alacrity in infusing considerable liquidity in to the system. Falling inflation, a positive byproduct of global crisis, enabled the central bank to loosen monetary policy more aggressively. As indicated earlier, the RBI
  17. 17. lowered the cash reserve ratio (CRR) requirements of banks from 9 per cent to 5 per cent, statutory reserve ratio (SLR) requirements from 25 per cent to 24 per cent and the repo rate (the rate at which it lends to banks overnight), from 9 per cent to 5 per cent and reverse repo rate (the rate at which RBI borrows from banks) from 6 per cent to 3.5 per cent. It also opened a special window for banks for short-term funds for on-lending to mutual funds, NBFC’s and housing finance companies. It has also started the buy-back of the market stabilization scheme (MSS) securities from mid-November. RBI has opened a refinance facility to Small Industrial Development Bank of India (SIDBI), National Housing Bank (NHB) and EXIM Bank and a liquidity facility to NBFCs through a SPV. It also has opened a dollar swap arrangement for banks for their overseas operations. The actual or potential liquidity injection under all these measures has been estimated at Rs. 3, 88,045 Crore equivalent to over 7 per cent of GDP. This is indeed an impressive slew of monetary policy measures and shows that the RBI is both watchful and active. The present problem is that this additional liquidity seems to have either found its way into a build-up of bank deposits or been preempted by government borrowing. There is hardly any evidence that it has been used for boosting either investment or consumption demand. The liquidity crisis and credit crunch felt in the economy from mid-September to October 2008 has turned into a situation of deep demand contraction for bank finance as the effects of global recession has spread to India. In fact the expansion of bank finance in January 2009 has been negative at Rs.11, 218 Crore as against an expansion of Rs. 70,396 Crore in the same month of 2008 (Fig. 18). In the last four months from November 2008 to February 2009, expansion of bank finance to the commercial sector has been just Rs. 60,862 Crore as compared to Rs. 2, 36,227 Crore in the same period last year. This reflects a very soft investment sentiment in the economy which may persist in the coming months.
  18. 18. Fiscal Stimulus Due to the acuteness of the financial crisis and the ineffectiveness of monetary policy, governments across the world have announced various fiscal stimulus packages to counter the crisis. In terms of GDP, South African government has announced the biggest stimulus package that constitutes around 24 per cent of GDP .The second biggest stimulus package has been announced by the Chinese government which constitutes 16.3 per cent of GDP with a total amount of around US$ 586 billion. In absolute terms, the US fiscal stimulus is the largest with an amount of US$ 787 billion. However, these fiscal numbers do not provide the real estimate of total stimulus as guarantees are not included in these calculations or automatic stabilizers provided in certain countries. The Indian government’s fiscal package is small in magnitude constituting around 1.3 per cent of GDP for 2008-09. This seems to be quite small as compared to most of the countries. But as has been reiterated earlier there is less fiscal headroom in India which is already running a high public debt. The Indian economy was on a cyclical slowdown after a five-year record boom and there was every hope that the economy will go for another strong growth phase after this brief slowdown. The global crisis has changed that outlook and instead will deepen and prolong Indian economy’s slowdown. It has dealt a
  19. 19. severe blow to investment sentiments and consumer confidence in the economy. The policy response so far has been prompt in the form of monetary easing and fiscal expansion but the impact may not be much in the near term. A major worry is the severe weakening of India’s fiscal position and balance of payments during this crisis period. The basic question is how long it will take to revive the investment and consumer demand which are falling precipitously. The real challenge for Indian policy makers and India Inc is however to try and raise the share of India’s exports in major markets and product segments. It is really ironical that India’s share in world trade is lower than the level as in 1950!! This is not tenable any longer if we have to achieve rapid growth with equity. Exports have the desirable characteristic of being relatively labor intensive. This is especially true of services exports that include a wide range of exports such as software, tourist earnings, films, accountancy, legal services etc. On the other hand, there is hardly reason for our textile and garment exports to lose grounds, as they have been doing, to Bangladesh, Vietnam and other such smaller economies when we still have such a large pool of unemployed human resources. For pushing both services and labor intensive manufactured exports, the policy makers must pay much greater attention to labor market reforms on the one hand and to development of vocational skills on the other. Overall, it is important to emphasize that while fiscal and monetary stimuli may provide the much needed short term palliatives for shoring up the GDP growth, the real push will only come from implementing structural reforms, the agenda for which has really been put on the shelf for a while. We cannot hope to generate the needed economic activity or the employment levels by continuing to tinker around with the economy. Bold and visionary measures, such as those undertaken in the early nineties, are needed again if the economy is not to slip into a prolonged phase of anemic growth.
  20. 20. Aluminum Industry in India Aluminum Industry in India is one of the leading industries in the Indian economy. The main operations of the of the India aluminum industry is mining of ores, refining of the ore, casting, alloying, sheet, and rolling into foils. At present, Hindalco and Nalco are one of the most economical in the production of aluminum in the world. Aluminum industry, which is highly capital intensive and scale sensitive, depends on two major variable cost components viz. alumina and power. Bauxite from which alumina is obtained, being a bulk commodity, has forced companies to be concentrated near bauxite deposits. With over 7% growth per annum, one of the highest in the world, the Indian aluminum market is booming. Even better, sectors that extensively use aluminum are themselves booming, ensuring that this sector stays firmly on the growth path for times to come. Fortunately for India, it is perched atop the 5th largest Bauxite reserves in the world with one of the world's lowest per capita consumption rates that is set to explode. Together, these factors spell one clear outcome: that if you're a player in the global aluminum sector, India is where the action and the future of your business lie. The India aluminum Metal Industries sector in the previous decade experienced substantial success among the other industries. The India aluminum industry is developing fast and the advancement in its technologies is boosting the growth even faster. The utilization of both international and domestic resources was significant in the rapid development of the India aluminum industry. This rapid development has made the India aluminum industry prominent among the investors. The India aluminum industry has a bright future as it can become one of the largest players in the global aluminum market as in India the consumption is fairly low, the industry may use the surplus production to cater the international need for aluminum which is used all over the world for several applications such as aircraft manufacturing,
  21. 21. automobile manufacturing, utensils, etc. The Indian aluminum sector is characterized by large integrated players like Hindalco and National Aluminum Company (Nalco). The other producers of primary aluminum include Indian Aluminum (Indal), now merged with Hindalco, Bharat Aluminum (Balco) and Madras Aluminum (Malco) the erstwhile PSUs, which have been acquired by Sterlite Industries. Consequently, there are only three main primary metal producers in the sector. Some Key points regarding this sector: • The per capita consumption of aluminum in India continues to remain abysmally low at under 1 kg as against nearly 25 to 30 kgs in the US and Europe, 15 kgs in Japan, 10 kgs in Taiwan and 3 kgs in China. The key consumer industries in India are power, transportation, consumer durables, packaging and construction. Of this, power is the biggest consumer (about 44% of total) followed by infrastructure (17%) and transportation (about 10% to 12%). However, internationally, the pattern of consumption is in favor of transportation, primarily due to large-scale aluminum consumption by the aviation space. • In order to protect the domestic industry, the government has imposed up to 30% safeguard duty on import of aluminum products from China. Imports of aluminum flat sheets used by sectors like auto and construction are imposed a duty of 12% to 14% while import of aluminum foils, mainly used by the packaging industry attracts around 25% to 30% duty. This duty is imposed for a period of two years starting March 2009. Aluminum: Through the lens of Michael Porter Backed by abundant and good quality bauxite reserves and cheap labor costs, Indian aluminum producers have emerged among the lowest cost aluminum producer in the world. India is home to the sixth largest bauxite deposit in the world which makes its
  22. 22. world’s 5th largest aluminum producer. Aluminum industry in India registered a phenomenal growth during the past few years on the back of robust growth in the economy. However, the current ongoing global crisis seems to have created some medium term hiccups. We have analyzed the domestic aluminum industry through Michael Porter’s five forces model so as to understand the competitiveness of the sector. Barriers to entry: We believe that the barriers to entry are medium. Following are the factors that vindicate our view. 1. Economies of scale: As far as the sector forces go, scale of operation does matter. Benefits of economies of scale are derived in the form of lower costs and better bargaining power while sourcing raw materials. It may be noted that the minimum economic size of a fully integrated Greenfield smelter is around 250,000 tonnes. The aluminum companies, which are integrated, have their own mines for key raw materials such as bauxite and coal and this protects them from the potential threat for new entrants to a significant extent. They also have their own power plants as it is a major cost driver. 2. Capital intensive: Aluminum industry is a highly capital intensive business. It is estimated that a capital investment of around US$ 1.2 bn is required to setup an economically viable Greenfield project. 3. Higher gestation period: The gestation period for an economically viable green field plant is over 4 years while for a Brownfield project, (modernization / capacity addition) the gestation period is relatively lower between 1.5 years to 2 years. 4. Government policies: The government has a favorable policy towards aluminum manufacturers. In fact to protect the domestic industry, recently, the government has imposed duty on value added products like foils and rolled products from the Chinese markets. However, similar to other sectors, there are certain discrepancies involved in allocation of mines and land acquisitions.
  23. 23. Furthermore, regulatory clearances and other issues are some of the major problems for the new entrants. Bargaining power of suppliers: The bargaining power of suppliers is low for fully integrated aluminum smelters (upstream) as they have their own mines for key raw material like bauxite. Examples here could be Nalco and Hindalco. However, those who are non-integrated or semi integrated, (downstream) have to depend upon the upstream producers for alumina or primary metal. While the bargaining power is limited in case of power purchase as it is highly regulated sector and government is the sole supplier most of the times, increasing usage of captive power plants are helping the companies to rationalize their costs to certain extent. Bargaining Power of Customers: Being a commodity, customers enjoy relatively high bargaining power as prices are determined on demand and supply. Competition: Competition is primarily on quality and price, as being a commodity, differentiation is difficult. However, the recent spate of consolidation has reduced the competitive pressure in the industry. Further, increasing value addition to aluminum products has helped some companies protect themselves from the high volatility witnessed in the industry. Threat of substitutes: On one side, the usage of aluminum is rising continuously in the automobile and construction sector but steel still remains a main substitute because of its relatively lower cost. On the other side, copper has been slowly substituting aluminum’s usage in the power sector due to its higher conductivity. However, with properties like higher strength-to-weight ratio, durability, higher corrosion-resistance and relatively lower cost, aluminum is able to hold its own. Thus the usage of aluminum is likely to increase over a long term period.
  24. 24. Global Aluminum Industry Global production of primary aluminum rose continuously from 32 million tonnes (MT) in 2005 to 38 MT in 2007, registering a CAGR of 9%. However, during 2008 the production remained flattish at around 38 MT (2007 levels) on account of significant fall in demand in the second half of the year due to the global credit crisis. This created a large amount of demand supply gap, thus making the inventory levels at LME reach their multi year highs. China accounted for around 30% of the total global aluminum production. Asia, once again showed the largest annual increase in consumption of primary aluminum, driven largely by increased industrial consumption in China, which has emerged as the largest aluminum consuming nation, accounting for 35% of global primary aluminum consumption in 2008. As far as the global consumption goes, it declined by around 3%YoY to 37 MT in 2008. The Indian aluminum industry registered a growth of around 9% in FY09. Strong growth in industrial, infrastructure, automobile, transportation and power sectors during the first half of the fiscal were the key drivers for the demand. However, realizations for the fiscal fell significantly on account of fall in LME prices due to the global credit crisis, thus causing a dent in margins. On the other hand, the steep depreciation of Indian rupee against the US dollar impacted the industry positively. The total aluminum production in the country stood at around 1.35 m tonnes in FY09. Prospects Overseas Demand Boosting Metal Prices - Demand in emerging markets like China and India, coupled with drastically reduced inventories and lower output, have boosted US metal prices. US Steel raised its prices three times between June and July 2009, while Alcoa boosted aluminum prices by 6 percent since the first quarter, according to Industry observers differ over whether prices will continue to rise, however. Some say US auto production is too weak to sustain higher prices, while Chinese consumption may slow. Output has furthermore stagnated despite higher prices, leaving metal makers still in search of profits.
  25. 25. Climate Bill Could Impact Steel Costs - A Congressional climate-change bill could add $1 billion to production costs for US steel producers by 2030. The Waxman- Markey bill calls for the reduction of carbon emissions by 17 percent by 2020 and more than 80 percent by 2050. The domestic steel industry accounts for about 9 percent of heavy emissions in the US heavy industry sector. Steel earnings could drop by 2 to 5 percent as a result of the legislation, and could fall further unless an offset penalty is imposed on imported steel, according to a recent Goldman Sachs report. Steel Imports Drop - US steel imports in June 2009 dropped to their lowest levels since 1975, according to the American Iron and Steel Institute. Steel import permit applications declined 23 percent compared to May, with Japan, India, South Korea, and China submitting the largest finished steel applications. Despite the falling applications, some industry observers are still concerned over unfairly traded imports: steel imports boast a 28 percent market share, while domestic production has slowed to 49 percent of capability. • Globally, the demand for aluminum is projected to fall by around 7% in 2009 on account of subdued conditions in the key user industries. However, China is projected to maintain the consumption levels of 2008 mainly due to the fiscal stimulus package that is likely to support its ailing economic growth. The revival in the demand for the metal is expected to start from 2010 globally. As per Alcoa, world’s largest aluminum producer, the demand for aluminum is projected to grow at around 6% CAGR till 2018 on account of newer packaging applications and increased usage in automobiles, consumer durables, construction and defense. • With key consuming industries forming part of the domestic core sector, the aluminum industry is sensitive to fluctuations in performance of the economy. Power, infrastructure and transportation account for almost 3/4th of domestic aluminum consumption. With the government focusing towards bringing back GDP growth rates of above 8%, the key consuming industries are likely to lead the way, which could positively impact aluminum consumption. Domestic demand growth is likely to remain robust over a long term period.
  26. 26. HINDALC CO Hin ndalco's businesses Hin ndalco in I India enjoy a leader ys rship posit tion in alu uminum and copper. The com mpany's alu uminum un nits across the country encomp pass the en ntire gamu of ut oper rations from bauxite m m mining, alum mina refinin aluminum smelting to downstr ng, m ream rolli ing, extrusio foils an alloy wh ons, nd heels, along with captiv ve Pow plants and coal m wer mines. The Birla Cop pper unit p produces co opper catho odes, cont tinuous cas copper ro along w other by st ods with y-products, including g gold, silver and r DAP fertilizers s. Brie history ef The Hindalco story unfo e olds with th establish he hment of th compan in 1958, the he ny , com mmissioning of the alu g uminum fa acility at Re enukoot in 1962 and the Renus sagar Pow Plant in 1967. Ove the years Hindalco has grown into the la wer n er s, n argest vertic cally inte egrated alum mpany in the countr and am minum com ry mong the l largest prim mary prod ducers of al luminum in Asia. Its co n opper smelt is today the world’s largest cus ter s stom sme elter at a si ingle locatio Hindalc on. co’s journey has been challengin at times, but y n ng , truly exhilaratin y ng. 200 07 :: In May 200 Novelis became a Hindalco su n 07, ubsidiary w the com with mpletion of the f acquisition p a process. Th transactio makes Hindalco the world's lar he on H e rgest aluminum ro olling comp pany and on of the big ne ggest produ ucers of prim mary alumin num in Asia, as well w as being India's lea g ading coppe producer. er :: A Acquisition of Alcan's 45 per ce equity stake in th Utkal Alumina pro s ent he oject, th hereby mak king Hindalc the 100 p cent pro co per oject owner.
  27. 27. 2006 :: Joint Venture with Almex USA for manufacture of high strength aluminum alloys for applications in aerospace, sporting goods and surface transport industries. :: Signed a MoU with the government of Madhya Pradesh for a Greenfield aluminum smelter in the Siddhi district of the state. :: Hindalco completes largest Rights Issues in the history of Indian capital markets with total size of Rs. 22,266 million. :: Hindalco announces 10:1 stock split. Each shares with face value of Rs. 10 split into 10 shares of Re 1 each. :: In May 2006, the company entered into a JV with Essar Power (M.P.) Ltd. to develop and operate coal mines at Mahan, Madhya Pradesh. The JV will supply coal to the proposed aluminum smelter and power complex in Madhya Pradesh. :: In May 2006, company's copper mining subsidiary Aditya Birla Minerals Limited (formerly Birla Mineral Resources Pty Ltd.) came out with an equity offering and subsequent listing on the Australian Stock Exchange (ASX). :: In March 2006, the company acquired an aluminum rolling mill and wire rods facility situated at Mouda (Nagpur), from Asset Reconstruction Company (India) Ltd (ARCIL), belonging to Pennar Aluminum Company Ltd. 2005 :: All businesses of Indal, except for the Kollur Foil Plant in Andhra Pradesh, merged with Hindalco Industries Limited. :: In September 2005, the company split its shares in ratio of 10:1 in order to enhance liquidity and to encourage participation from retail investors. :: Aditya Birla Group to set up a world-class aluminum project in Orissa at a project cost of about Rs.11, 000 Crore. :: MoUs signed with state governments of Orissa and Jharkhand for setting up
  28. 28. Greenfield alumina refining, smelting and power plants. :: Commissioned Copper III expansion, taking total capacity to 500,000 tpa. 2004 :: Scheme of arrangement announced to merge Indal with Hindalco. :: Copper smelter expansion to 250,000 tpa. 2003 :: Hindalco acquires Nifty Copper Mine through Aditya Birla Minerals Ltd. (ABML, formerly Birla Minerals Resources Pty. Ltd.). :: ABML acquires the Mount Gordon copper mines in November 2003. :: Hindalco becomes majority stakeholder in Utkal Alumina, a joint venture with Alcan. :: The amalgamation of Indo-Gulf's copper business with Hindalco becomes effective from 12 February 2003. :: Equity stake in Indal increased to 96.5 per cent through an Open Offer. :: Divestment of 8.6 per cent holding in Indo Gulf Fertilizers Ltd. :: Brownfield expansion of aluminum smelter at Renukoot to 345,000 tpa. 2002 :: Brownfield expansion at an outlay of Rs.1, 800 Crore — ninth potline commissioned. :: Buyback of equity shares to generate shareholder value and to utilize surplus cash. :: Major corporate restructuring to create a non-ferrous metals powerhouse: :: The amalgamation of Indo Gulf Corporation Ltd.'s copper business, Birla Copper, with Hindalco with effect from 1 April 2002. :: Open offer to acquire additional equity to make Indal a wholly-owned
  29. 29. subsidiary. 2001 :: Hindalco enters 'The Asia Top 25' list of the CFO Asia Annual Report Survey, the only Indian company in 2001. 2000 :: Acquisition of controlling stake in Indian Aluminum Company, Limited (Indal) with 74.6 per cent equity holding. 1999 :: Aluminum alloy wheels production commenced at Silvassa. :: Brownfield expansion of metal capacity at Renukoot to 242,000 tpa. 1998 :: Foil plant at Silvassa goes on stream. :: Hindalco attains ISO 14001 EMS certification. 1995 :: Mr. Kumar Mangalam Birla takes over as Chairman of Indal Board. 1994 :: A huge expansion, modernization and diversification program takes off. 1991 :: Beginning of major expansion program. 1967 :: Commissioning of Renusagar Power Plant — a strategic and farsighted move.
  30. 30. 1965 :: Downstream capacities commissioned (Rolling and Extrusion Mills at Renukoot). 1962 :: Commencement of production at Renukoot (Uttar Pradesh) with an initial capacity of 20,000 mtpa of aluminum metal and 40,000 mtpa of alumina. 1958 :: Incorporation of Hindalco Industries Limited.
  31. 31. Recent accolades Hindalco won the prestigious “D.L. Shah National Award for Economics of :: Quality” given by Quality Council of India, presented by the President of India, H.E. Dr. A.P.J. Abdul Kalam, on 9 February 2007. National Energy Conservation Award-2006 was presented by the Ministry of :: Power, Government of India. Hindalco Hirakud Complex earned the Pollution Control Appreciation Award :: presented by the Orissa State Pollution Control Board. The IT department of Hindalco received prestigious IT certificates BS15000 (IT services), ISO 9001 Software development) and BS7799 (Information :: security). Hindalco's Renukoot IT function is the first in the Group as well as in India to be recommended for all these certifications in an integrated manner. The company's fabrication plant’s hot mill team won the prestigious Qualtech :: Award for their project "Reduction of time in work role change time”. Hindalco Taloja became the second unit after Renukoot to achieve the Integrated :: Management System Certificate, which combines ISO 9001, ISO 14001, OHSAS 18001 into one Business Excellence Model. Hindalco, Renukoot has won the National Award for Excellence in Water :: Management 2006 organized by CII. Hindalco Hirakud Power Plant team bagged second prize at the state level CII :: Orissa Award 2006 for Best Practices in Environment, Safety & Health. Hindalco Hirakud's Quality Circle 'Jagruti' bagged national level honours at the :: 20th National Convention of Quality Circles, organized by the Quality Circle Forum of India. Hirakud Power Plant team received the State Safety Award 2006 for their act of :: bravery in saving lives and preventing a disaster, by their proactive initiative to arrest the chlorine leakage at the Railway Colony in Sambalpur. Engineering Export Promotion Council (EEPC, Eastern Region) Award for :: Export Excellence in recognition of highest performance in export of engineering
  32. 32. goods (Primary Metal, Rolled Products) for 2003-04. "ICWAI National Award for Excellence in Cost Management-2005" presented by :: the Institute of Cost and Works Accountants of India (ICWAI). Renukoot Complex named the winner of the National Safety Award 2005 for the :: second consecutive year. Also awarded the Greentech Safety Silver Award for its outstanding safety performance during 2005-2006. Hirakud Smelter received the State Safety Award for best performance in Safety, Health & Environment Management-2004 as also the National Safety Award for :: outstanding performance in industrial safety in achieving the longest accident free period for the year — 2004 and Runners Up award for Lowest Accident Frequency Rate — 2004 for the second consecutive year. Hirakud also won the Shreshtha Surakhya Puraskar — 2004 and Prashansa Patra — 2005 from the National Safety Council of India, Mumbai, for developing and :: implementing effective occupational safety and health management systems and procedures. Hirakud Smelter also received the second prize for excellence in energy :: conservation in aluminum sector for 2005 from the Ministry of Power, GoI. The Muri Alumina Plant won the Greentech Safety Gold Award 2004-2005 and :: Silver Award 2005-2006, as also the Greentech Environment Silver Award 2004- 2005. The Kalwa Foil Plant was the recipient of the Dhanukar Rotating Trophy 2005- :: 2006 presented by the Indian Association of Occupational Health, Mumbai. The Belur Sheet Plant was named the winner of the National Award for Excellence in Water Management 2005 (Water Efficient Unit) and for Excellence :: in Energy Management 2005 (Energy Efficient Unit), presented by the CII — Sohrabji Godrej Green Business Centre. Belur also won the Greentech Environment Excellence Gold Award 2005. The Alupuram Extrusions plant earned the Best Safety Performance Award :: presented by the National Safety Council, Kerala Chapter, while Alupuram
  33. 33. Smelter was presented the Industrial Safety (Runners Up) Award for 2003-2005 for the lowest average accident frequency. Alupuram Extrusions earned the first prize in the Kerala state level Quality Circle :: Competition organized by CII. Alupuram Smelter ranked third in the Kerala state level Quality Circle :: Competition organized by CII. Bauxite and coal mines, in all regions (Jharkhand, Maharashtra, Chhattisgarh and Orissa) have won a host of awards in safety, environment, pollution control and overall performance during the Mines Safety Week and Mines, Environment & :: Mineral Conservation Week programmes organized by the Indian Bureau of Mines and the Directorate of Mines Safety.
  34. 34. Products and services Hindalco Industries has a number of products to offer in categories like alumina chemicals, aluminum foil and packaging, primary aluminum, aluminum alloy wheels, aluminum extrusions, copper products, aluminum rolled products and DAP/NPK complexes. In alumina chemicals section Hindalco Industries produces alumina and hydrates. In primary aluminum section its main offerings are ingots, billets and wire rods. In aluminum extrusions section major products are rods, channels, flats, round tubes, squares, rectangular tubes, equal leg angles and square tubes. In aluminum rolled products section main offerings of Hindalco Industries are building sheets, foil stock, cable wrap stock, hot rolled plates, circles, lampcap stock, closure stock, litho stock, cold rolled coils, pattern sheets, cold rolled sheets, PCB entry sheets and coils, finstock, spiral finstock and flooring sheets and tread plates. There are other products in this section as well. Aluminum … Hindalco was among the first few alloy wheels companies to have obtained the ISO/TS 16949 certification to meet the stringent standard of the automobile industry. In India, Hindalco enjoys a leadership position in specialty alumina, primary aluminum and downstream products. Apart from being a dominant player in the domestic market, Hindalco's products are well accepted in international markets. Exports account for more than 30 per cent of total sales. Hindalco's major products include standard and specialty grade alumina and hydrates, aluminum ingots, billets, wire rods, flat rolled products, extrusions, foil and alloy wheels
  35. 35. Copper Birla Copper, a unit of Hindalco is located at Dahej in Gujarat. The unit has the unique distinction of being the largest copper smelter in the world at a single location with 500,000 TPA capacity with multiple world class technologies. The facilities comprise copper smelters, precious metals, fertilizers, sulfuric acid, captive power plants, utilities and a captive jetty. Hindalco's Birla Copper is a renowned producer of copper cathodes and continuous cast copper rods since its inception, with ISO-9001:2000 (Quality Management systems), ISO-14001:2004 (Environmental Management System) OHSAS- 18001:2007 (Occupational Health and Safety Management Systems) accreditations. Mines The two copper mines in Australia were acquired in 2003. Birla Nifty mine consists of an open-pit mine, heap leach pads and a solvent extraction and electrowinning (SXEW) processing plant, which produces copper cathode. Birla Nifty's copper cathode capacity is 25,000 TPA. Open pit mining was completed in 2006. During FY2008, Nifty produced 5,112 tonnes of copper cathode. A copper sulphide deposit is located at the lower levels of the Nifty open pit mine and an underground mine and concentrator have been developed to mine and process ore from this deposit. The Nifty Sulphide Operation, commenced ore production from stoping in December 2005 and concentrate production in March 2006. During FY2008, Nifty produced 53,397 tonnes of copper in concentrate.
  36. 36. Production capacities Division Capacity and location 700,000 tpa (Renukoot) Alumina 350,000 tpa (Belgaum) 180,000 tpa (Muri) 375,000 tpa (Renukoot) Aluminum 143,000 tpa (Hirakud) 33,000tpa (Renukoot) Extrusions 13,000 tpa (Alupuram) 100,000 tpa (Renukoot) 57,000 tpa (Belur) Flat rolled products 50,000 tpa (Taloja) 30,000 tpa (Mouda) Redraw rods 75,000 tpa (Renukoot) 30,000 tpa (Silvassa) Foil and packing 6,000 tpa (Kalwa) 4,000 tpa (Kollur) Wheels 300,000 pcs (Silvassa) 742 mw (Renusagar) Captive power 78 mw (Renukoot) 368 mw (Hirakud) Copper cathodes 500,000 tpa (Dahej) Continuous cast copper rods 120,000 tpa (Dahej) Sulphuric acid 1,470,000 tpa (Dahej) Phosphoric acid 180,000 tpa (Dahej) DAP and complexes 400,000 tpa (Dahej) Gold 26 mt (Dahej) Silver 200 mt (Dahej) Power 135 mw (Dahej)
  37. 37. Mergers and Acquisitions Hindalco Industries Ltd. and Novelis Inc. announce an agreement for Hindalco's acquisition of Novelis for nearly US$ 6 billion Aditya Birla Group's Hindalco Industries Limited, India's largest non-ferrous metals company, and Novelis Inc. (NYSE: NVL) (TSX: NVL), the world's leading producer of aluminum rolled products, announced that they have entered into a definitive agreement for Hindalco to acquire Novelis in an all-cash transaction which values Novelis at approximately US$6 billion, including approximately US $2.40 billion of debt. Under the terms of the agreement, Novelis shareholders will receive US $44.93 in cash for each outstanding common share. Based in Mumbai, India, Hindalco is a leader in Asia's aluminum and copper industries, and is the flagship company of the Aditya Birla Group, a $12 billion multinational conglomerate, with a market capitalization in excess of $20 billion. Following the transaction Hindalco, with Novelis, will be the world's largest aluminum rolling company, one of the biggest producers of primary aluminum in Asia, and India's leading copper producer. Mr. Kumar Mangalam Birla, Chairman of the Aditya Birla Group, said, "The acquisition of Novelis is a landmark transaction for Hindalco and our Group. It is in line with our long-term strategies of expanding our global presence across our various businesses and is consistent with our vision of taking India to the world. The combination of Hindalco and Novelis will establish a global integrated aluminum producer with low-cost alumina and aluminum production facilities combined with high-end aluminum rolled product capabilities. The complementary expertise of both these companies will create and provide a strong platform for sustainable growth and ongoing success." Acting Chief Executive Officer of Novelis, Mr. Ed Blechschmidt, said, "After careful consideration, the Board has unanimously agreed that this transaction with Hindalco delivers outstanding value to Novelis shareholders. Hindalco is a strong, dynamic
  38. 38. company. The combination of Novelis' world-class rolling assets with Hindalco's growing primary aluminum operations and its downstream fabricating assets in the rapidly growing Asian market is an exciting prospect. Hindalco's parent, the Aditya Birla Group, is one of the largest and most respected business groups in India, with growing global activities and a long-term business view." Novelis was the global leader in aluminum rolled products and aluminum can recycling, with a global market share of about 19 per cent. Hindalco has a 60 per cent share in the currently small but potentially high-growth Indian market for rolled products. Hindalco's position as one of the lowest cost producers of primary aluminum in the world is leverageable into becoming a globally strong player. The Novelis acquisition gave Hindalco immediate scale and a global footprint. The transaction has been unanimously approved by the Boards of Directors of both companies. The closing of the transaction is not conditional on Hindalco obtaining financing. The transaction will be completed by way of a plan of arrangement under applicable Canadian law. It will require the approval of 66.66 per cent of the votes cast by shareholders of Novelis Inc. at a special meeting to be called to consider the arrangement followed by court approval. The closing of the transaction will also be subject to customary conditions including regulatory approvals, and is expected to be completed during the second quarter of 2007. Novelis is the global leader in aluminum rolled products and aluminum can recycling. The company operates in 11 countries, has approximately 12,500 employees and reported $8.4 billion in 2005 revenue. Novelis has the unrivaled capability to provide its customers with a regional supply of technologically sophisticated rolled aluminum products throughout Asia, Europe, North America and South America. Through its advanced production capabilities, the company supplies aluminum sheet and foil to the automotive and transportation, beverage and food packaging, construction and industrial, and printing markets.
  39. 39. Hindalco & Market in India After functioning for over 3 decades in an era of the protective license raj, being exposed to a market where competition exists at a global level would probably make most India companies weak in the knees. But Hindalco Limited has lived through both environments of protection and cutthroat competition and has emerged unscathed. Low cost production, incremental capacity additions, continuous modernization and efficient asset utilization have been the underpinnings of Hindalco's strategy. The company is vertically integrated right from the mining of bauxite till the production of value-added products like extruded products, rolled products, rods and foils. Aluminum has remained the sole focus of the company. The management of the company has been responsive to the changes in the environment and has taken steps accordingly to ensure efficient running of its business. Envisaging a power-deficit scenario, Hindalco installed a 100 percent captive power unit as early as 1967. The
  40. 40. power plant (612 MW) has been run at peak load factors, and has today, made Hindalco completely self sufficient in its power requirements. The net result is that its efficiency norms are better than most of its peers. This backward integration strategy of Hindalco has paid it rich dividends. The captive sources for bauxite and power and proximity from coal mines to its power plant and smelter give Hindalco an unmatched competitive advantage. In fact, it is rated amongst the cheapest producers of aluminum in the world. Besides, being an integrated producer, it has more flexibility in pricing as compared to its competitors in the local market who convert from scrap or metal, especially in situations when prices are rising. The company is seen, more often than not, as the leader in setting prices for the domestic industry. The fortunes of aluminum companies in India are dependent on several key factors and Hindalco is no exception to any of these. With a fall in import duties on aluminum, Indian companies today, no longer enjoy the protection available to other sectors. Besides domestic competition, Indian aluminum companies also have to compete with relatively cheaper imports. This makes the profitability of these companies very vulnerable to changes in the international prices of aluminum and the value of the Indian rupee. In recent times, aluminum companies in India have had a mixed run. Though the prices of aluminum declined (leading to a squeeze in margins), the value of the rupee also fell. This made aluminum cheaper to export from India, and that much more expensive to import. With its fundamentals in place, Hindalco has been able to face the challenges of weak demand and prices, both in international and domestic markets. In order to increase value addition, Hindalco has now added and modernized downstream facilities (rolling, extrusion, foils). It is now focused on increasing its downstream sales to improve margins and drive bottom-line growth. It is pricing its products aggressively to penetrate the market. During the first quarter of the current financial year, Hindalco's turnover growth of 14.5 percent was lead by an improvement in sales mix. The company sold more of higher value rolled products and foils. Thus while metal production increased by 5.6 percent and average prices
  41. 41. were up 3.5 percent, the product mix changes lead to a further 4.7 percent improvement in turnover. The recent run up in aluminum demand and prices have made analysts look up and take notice. The stock has been a star performer at the bourses raking in impressive gains of over 100 percent over just the past 6 months. But that is not the only reason. The market has appreciated the recent shift in the perspective of the Birla Group, which was recently spelt out by Chairman, Kumar Birla. It espouses a clear focus for each group company, within its ambit of businesses, and efforts to unwind the investments made by the companies in unrelated businesses. In line with its new credo, Hindalco shelved its proposed Greenfield aluminum project and is instead considering a Brownfield expansion. It also made a bid for Balco, an integrated aluminum company, for which the government has announced a strategic sale of its stake. With the overhang of a fresh plant now out of the way, industry observers are seeing Hindalco in a new light. The new focus may also see Hindalco reduce in large investments (Rs 4.8 bn in financial year 99) in group companies.
  42. 42. Financial Statement Analysis Executive Summary Hindalco Industries Ltd. Mar 2007 Mar 2008 Rs. Crore (Non-Annualised) 12 mths 12 mths - Total income 158.6441235 114.3565694 Sales 159.2368844 107.9950857 Income from financial services 140.8347913 248.2029493 Total expenses 149.2800309 110.1619313 Raw material expenses 166.1053982 113.35345 Power, fuel & water charges 101.5546717 103.417531 Compensation to employees 88.27000236 117.0690178 Indirect taxes 148.3553144 119.7206463 Selling & distribution expenses 117.7109206 106.7222178 PBDITA 154.2514181 111.2833795 PBDTA 154.7231904 103.6859647 PBT 166.4353897 102.9277675 PAT 154.8929359 117.9161004 Net worth 12418.04 17296.74 Paid up equity capital (net of forfeited capital) 104.33 122.65 Reserves & surplus 12313.71 17173.68 Total borrowings 7359.24 8467.7 Current liabilities & provisions 4036.9 3800.77 Total assets 25007.81 30963.47 Gross fixed assets 12539.47 13566.03 Net fixed assets 8483.14 8929.21 Investments 8804.78 14107.99 Current assets 7470.77 7748.62 Loans & advances 178.12 103.06 Growth (%) Total income 58.64412353 9.049543747 Total expenses 49.28003094 6.807294494 PBDITA 54.25141808 7.314927533 PAT 54.89293588 11.56676403 Net worth 29.31806014 39.32276375 Total assets 32.25970232 23.81520013
  43. 43. Ratio Analysis  Profitability Ratios Profitability Ratios are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time Return on Total Assets (ROTA): Ratio measuring the operating profitability of a firm, expressed as a percentage of the operating assets. ROTA indicates a firm's ability to efficiently allocate and manage its resources but (unlike 'return on equity') ignores the firm's liabilities. It is calculated by ROTA = (Income before interest and tax / Total Assets)*100 2006-07 2007-08 EBIT 3800.9 4084.36 Total Assets 25007.81 30963.47 ROTA (%) 15.19 16.33 ROTA (%) 16.6 16.4 16.2 16 15.8 15.6 15.4 ROTA (%) 15.2 15 14.8 14.6 2006‐07 2007‐08 As can be observed the ROTA is increasing as the Total Assets is increasing thus we can see that the increasing the capacity is helping the company gain better profitability. The company’s earning in proportion to its total assets has uniformly increased; it indicates company is effectively using its asset s to generate income. Capacity expansion has helped the organization. ROTA from Core Business: Return of Asset from CORE Business is an indicator of how profitable company is with respect to its core business only. All other source of
  44. 44. incomes are not considered while considering the ratio calculation. ROTA from CORE Business = (EBIT – Income from Investments / Total Assets – Investments)*100 2006-07 2007-08 EBIT 3800.9 4084.36 Total Assets 25007.81 30963.47 Investments 8804.78 14107.99 Income From 299.58 579.66 Investments ROTA from Core 21.61% 20.79% Business ROTA from Core Business 21.80% 21.60% 21.40% 21.20% 21.00% ROTA from Core Business 20.80% 20.60% 20.40% 20.20% 2006‐07 2007‐08 The return from core business has declined because the company has earned relatively larger income through outside investments. Its better it’s better to invest in core business as returns from business compared with ROTA are high.
  45. 45. ROTA after TAX: 2006-07 2007-08 PAT 2556.35 2259.87 Interest Paid 296.27 518.08 Tax (%) 31 31 Total Assets 25007.81 30963.47 ROTA After Tax (%) 11.03965641 8.45300995 ROTA After Tax(%) 12 10 8 6 ROTA After Tax(%) 4 2 0 2006‐07 2007‐08 As interest payment has increased in year 2007-08 by 93.49 % thus resulting in reduction of ROTA after tax. Return on Capital Employed (ROCE): A ratio that indicates the efficiency and profitability of a company's capital investments. ROCE = (EBIT / Capital Employed)*100 2006-07 2007-08 EBIT 3800.9 4084.36 Capital Employed 20970.91 27162.7 ROCE 18.12463074 15.03664952 The future maintainable profits have not matched the pace with the increase in company’s capital employed. The company should try to increase its net current assets to
  46. 46. enhance the profitability wiz a vi total capital employed. Return on Equity (ROE): The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE= {(PAT – Dividend for Preference Shares)/Net Worth}*100 Net Worth= Share Capital + General Reserves – Misc. Expenditure 2006-07 2007-08 PAT* 2556.35 2259.87 Dividend for Preference 0 0.02 Shares Net Worth 12418.04 17296.74 ROE 20.58577682 13.06517876 *PAT has been adjusted for extra-ordinary items for the three years. ROE 25 20 15 10 ROE 5 0 2006‐07 2007‐08 Due to decrease in financial leverage Net Worth of company has increased. Also the future maintainable profit has not increased in the same proportion as the Net Worth of the company thus ROE for the company has gone down.
  47. 47. MARGIN RATIOS It is the amount of profit (at the gross, operating, pre tax or net income level) generated by the company as a percent of the sales generated. The objective of margin analysis is to detect consistency or positive/negative trends in a company's earnings. Positive profit margin analysis translates into positive investment quality. To a large degree, it is the quality, and growth, of a company's earnings that drive its stock price. 1. GROSS MARGIN PERCENTAGE (GMP) A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings. GMP = (GROSS MARGIN/SALES)*100 2006-2007 2007-2008 SALES 19882.19 20880.45 COGS 13833.89 13614.76 Gross Profit 30.42 % 34.80% Gross Profit 36.00% 35.00% 34.00% 33.00% 32.00% Gross Profit 31.00% 30.00% 29.00% 28.00% 2006‐2007 2007‐2008 The GMP has increased because of the increase in gross margin which is in account of relatively lesser cost of goods sold (COGS). Though the sales have improved the COGS has also gone down.
  48. 48. 2. OPERATING PROFIT MARGIN (OPM) A ratio used to measure a company's pricing strategy and operating efficiency. Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. Operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each dollar of sales. When looking at operating margin to determine the quality of a company, it is best to look at the change in operating margin over time and to compare the company's yearly or quarterly figures to those of its competitors. If a company's margin is increasing, it is earning more per dollar of sales. The higher the margin, the better. OPM = (OPERATING PROFIT/SALES)*100 2006-2007 2007-2008 OPEARTING PROFIT 4353.7 4672.17 SALES 19882.19 20880.45 OPM (%) 21.90% 22.38% OPM(%) 22.50% 22.40% 22.30% 22.20% 22.10% 22.00% OPM(%) 21.90% 21.80% 21.70% 21.60% 2006‐2007 2007‐2008
  49. 49. The operating profit margin has remained almost stable in 2007-08. The operating profit has been able to match the increase in sales. It means the level of operating expenses have been able to match the increase in sales. High operating profit margin shows that company is in good state and has healthy margins. One of the primary reasons being that it is the market leader thus is able to command its position in market. 3. NET PROFIT MARGIN A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Looking at the earnings of a company often doesn't tell the entire story. Increased earnings are good, but an increase does not mean that the profit margin of a company is improving. For instance, if a company has costs that have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control. NPM = (PROFIT AFTER TAX/SALES)*100 2006-2007 2007-2008 PAT 2556.35 2259.87 SALES 19882.19 20880.45 NPM (%) 12.86% 10.82%
  50. 50. NPM(%) 13.50% 13.00% 12.50% 12.00% 11.50% NPM(%) 11.00% 10.50% 10.00% 9.50% 2006‐2007 2007‐2008 The reduction in Net profit margin primarily is due to high increase in interest paid during the year. Also there is a reduction in the leverage of the company, which combined with negative impact of global recession and price fluctuation caused Market to Market losses.
  51. 51. ACTIVITY RATIOS Accounting ratios that measure a firm's ability to convert different accounts within their balance sheets into cash or sales. Companies will typically try to turn their production into cash or sales as fast as possible because this will generally lead to higher revenues. Such ratios are frequently used when performing fundamental analysis on different companies. The asset turnover ratio and inventory turnover ratio are good examples of activity ratios. 1. INVENTORY TURNOVER RATIO (ITR) A ratio showing how many times a company's inventory is sold and replaced over a period. Although the first calculation is more frequently used, COGS (cost of goods sold) may be substituted because sales are recorded at market value, while inventories are usually recorded at cost. Also, average inventory may be used instead of the ending inventory level to minimize seasonal factors. This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. ITR = Cost of Goods Sold (COGS) / Average Inventory High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall. 2006-2007 2007-2008 COGS 13833.89 13614.76 AVERAGE 4205.2 4706.61 INVENTORY ITR(times) 3.289710359 2.892689218
  52. 52. ITR(times) 3.4 3.3 3.2 3.1 3 2.9 ITR(times) 2.8 2.7 2.6 2006‐2007 2007‐2008 The ITR ratio of the company has decreased a little with comparison to previous years but still the company is able maintain an ITR which is pretty decent compared to the industry standards. 2. DEBTORS TURNOVER RATIO (DTR) An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. Some companies' reports will only show sales - this can affect the ratio depending on the size of cash sales. By maintaining accounts receivable, firms are indirectly extending interest-free loans to their clients. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient. A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm. DTR = NET SALES/AVERAGE DEBTORS 2006-2007 2007-2008 Credit SALES 19882.19 20880.45 AVERAGE DEBTORS* 2296.26 2496.845 DTR(times) 8.658509925 8.36273377 *AVERAGE DEBTORS = (OPENING RECEIVABLES + CLOSING RECEIVABLES)/2
  53. 53. DTR(times) 8.7 8.6 8.5 8.4 DTR(times) 8.3 8.2 2006‐2007 2007‐2008 The company maintains a very healthy DTR thus suggesting that it has good relations with all its customers and is able to receive most of the credit sales payment on the time which in turn is helping it operations. 4. AVERAGE DEBT COLLECTION PERIOD AVERAGE DEBT COLLECTION PERIOD = Average Debtors / Credit Sales per Day 2005-2006 2006-2007 Average Debtors 2296.26 2496.845 Credit Sales per day 54.47175342 57.20671233 AVERAGE DEBTORS 42.15505938 43.64601457 COLLECTION PERIOD(Days) AVERAGE DEBTORS COLLECTION  PERIOD(Days) 44 43.5 43 42.5 AVERAGE DEBTORS  42 COLLECTION  PERIOD(Days) 41.5 41 2005‐2006 2006‐2007
  54. 54. 3. WORKING CAPITAL TURNOVER RATIO (WCTR) A measurement comparing the depletion of working capital to the generation of sales over a given period. This provides some useful information as to how effectively a company is using its working capital to generate sales. A company uses working capital (current assets - current liabilities) to fund operations and purchase inventory. These operations and inventory are then converted into sales revenue for the company. The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales. WCTR = NET SALES/AVERAGE WORKING CAPITAL 2006-2007 2007-2008 NET SALES 19882.19 20880.45 AVERAGE WORKING 3684.96 3690.86 CAPITAL WCTR(times) 5.39549683 5.657340024 WCTR(times) 5.7 5.65 5.6 5.55 5.5 5.45 WCTR(times) 5.4 5.35 5.3 5.25 2006‐2007 2007‐2008 The company is operating at a Moderate Working Capital turnover ratio, which ensures that company is generating lot of sales in return of the money it is investing. Also due to high DTR the company has flexibility of having liquid assets.
  55. 55. 4. FIXED ASSETS TURNOVER RATIO (FATR) A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. This ratio is often used as a measure in manufacturing industries, where major purchases are made for PP&E to help increase output. When companies make these large purchases, prudent investors watch this ratio in following years to see how effective the investment in the fixed assets was. FATR = NET SALES/AVERAGE FIXED ASSETS 2006-2007 2007-2008 NET SALES 19882.19 20880.45 AVERAGE FIXED 8049.425 8706.175 ASSETS FATR(times) 2.470013697 2.398349447 FATR(times) 2.48 2.46 2.44 2.42 2.4 FATR(times) 2.38 2.36 2006‐2007 2007‐2008 This ratio has reduced from last year. Capacity in form of fixed assets has increased but FATR has reduced thus showing that company is working at low capacity utilization. The global negative effect of recession may be playing the adverse effect.
  56. 56. 5. TOTAL ASSETS TURNOVER RATIO (TATR) TATR = NET SALES/AVERAGE TOTAL ASSETS 2006-2007 2007-2008 NET SALES 19882.19 20880.45 AVERAGE TOTAL 21957.96 27985.64 ASSETS TATR(times) 0.905466173 0.746113007
  57. 57. CAPITAL STRUCTURE AND SOLVENCY RATIOS One of many ratios used to measure a company's ability to meet long-term obligations. The solvency ratio measures the size of a company's after-tax income, excluding non-cash depreciation expenses, as compared to the firm's total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations Acceptable solvency ratios will vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than 20% is considered financially healthy. Generally speaking, the lower a company's solvency ratio, the greater the probability that the company will default on its debt obligations. 1. DEBT-EQUITY RATIO A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation. Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as companies'. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.
  58. 58. The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5. DEBT EQUITY RATIO = LONG TERM DEBT/NET WORTH 2006-2007 2007-2008 LONG TERM DEBT 14276.24 14221.86 NET WORTH 12418.04 17296.74 DE RATIO 1.14 0.82 DE RATIO 1.4 1.2 1 0.8 0.6 DE RATIO 0.4 0.2 0 2006‐2007 2007‐2008 The Debt Equity Ratio is very less and has reduced as compared to the previous year. Thus there is in reduction in leverage of the company and most of the operations are financed through shareholder’s equity. 2. ASSET LEVERAGE RATIO ASSET LEVERAGE RATIO = TOTAL ASSETS/NET WORTH 2006-2007 2007-2008 TOTAL ASSETS 25007.81 30963.47 NET WORTH 12418.04 17296.74 ALR 2.013829074 1.790133285
  59. 59. ALR 2.05 2 1.95 1.9 1.85 1.8 ALR 1.75 1.7 1.65 2006‐2007 2007‐2008 Low Asset Leverage ratio suggests that company is dependent more on the funds collected through shareholder’s equity. Also the increase in total assets is less as compared to increase in the Net Worth of the company thus there is a decrease in the ALR ratio from last year. 3. INTEREST COVERAGE RATIO A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period: The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses. INTEREST COVERAGE RATIO = EBIT/INTEREST 2006-2007 2007-2008 EBDITA 4353.7 4672.17 INTEREST 296.27 518.08 ICR 14.69504168 9.018240426
  60. 60. LIQUIDITY RATIOS A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Different analysts consider different assets to be relevant in calculating liquidity. Some analysts will calculate only the sum of cash and equivalents divided by current liabilities because they feel that they are the most liquid assets, and would be the most likely to be used to cover short-term debts in an emergency. A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern. 1. CURRENT RATIO A liquidity ratio that measures a company's ability to pay short-term obligations The ratio is mainly used to give an idea of the company's ability to pay back its short- term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more useful to compare companies within the same industry.
  61. 61. This ratio is similar to the acid-test ratio except that the acid-test ratio does not include inventory and prepaids as assets that can be liquidated. The components of current ratio (current assets and current liabilities) can be used to derive working capital (difference between current assets and current liabilities). Working capital is frequently used to derive the working capital ratio, which is working capital as a ratio of sales. CURRENT RATIO = CURRENT ASSETS/CURRENT LIABILITIES    2006‐2007 2007‐2008 CURRENT ASSETS  14920.31 17510.67 CURRENT LIABILITIES 4036.9 3800.77 CURRENT RATIO  3.695982065 4.607137501 Current Ratio of the company is very high w.r.t to industry standards which is 2:1. Current ratio has increased thus company is in better position to meet short term liabilities. It is a good sign of financial health. 2. LIQUID RATIO A stringent test that indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets. Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent on inventory. Retail stores are examples of this type of business.
  62. 62. LIQUID RATIO = LIQUID ASSETS/CURRENT LIABILITIES 2006-2007 2007-2008 LIQUID ASSETS 3155.46 2650.71 CURRENT LIABILITIES 4036.9 3800.77 LIQUID RATIO 0.78165424 0.697413945 The low value of the liquid ratio suggests that company’s current assets are highly dependent on inventories, thus company may face difficulties in resolving short term liabilities.