Over the past few years, India Inc made some high-profile overseas acquisitions. Hindalco Industries Ltd’ buyout of the world’s largest aluminium can body maker Novelis Inc, Tata Motors Ltd’s purchasing of the iconic Jaguar and Land Rover (JLR) brands from Ford Motor Co and Suzlon Energy Ltd’s acquisition of REPower were some of them. The dramatic turn of events in economies worldwide since the collapse of Lehman Brothers in the US in 2008 has left Indian companies to piggyback on these acquisitions to salvage their poor performances back home.
Hindalco-Novelis
Hindalco, a flagship company of the Aditya Birla Group, spent Rs 33,000 crore to buy Canadian firm Novelis in 2007. Hindalco was already an aluminium maker and wanted a presence in the value-added segment as well. However, Novelis, at the time of the acquisition, was in major trouble and Hindalco had to do a fair amount of restructuring, from shutting plants to shifting a facility to India to come back to its feet. In 2010, after Novelis became self-sustaining again, Hindalco raised Rs 22,000 crore on Novelis’ books and took back Rs 9,350 crore to fund its mammoth Rs 23,000-crore expansions undergoing in India.
Hindalco is yet to announce the consolidated results for the June quarter, but Novelis on August 14 reported a net profit of Rs 500 crore, up 20 per cent from the year-ago period. Hindalco’s stand-alone net profit for the quarter was Rs 424.77 crore, lower than Novelis’, and lowest since September 2009.
This was because of the subdued prices of aluminium on the London Metal Exchange (LME). Novelis, however, is completely immune from the fluctuations of aluminium LME as the company is in value-added aluminium products like can body. The costs, for Novelis, are pass-through which help the company in maintaining healthy margins when the profits of the Indian parent get affected by LME.
Tata Motors-JLR
The profits from the stand-alone operations of Tata Motors, India’s largest auto maker, have been on the decline since 2009-10. In the years ended March 2012, 2011 and 2010, the company reported profits of Rs 1,242 crore, 1,812 crore and Rs 2,24 crore, respectively.
JLR, on the other hand, have been the saving grace for Tata Motors as the two brands have been shoring up sales on the back of strong demand from China. In the June quarter, JLR sold 83,452 units, up 34 per cent on the back of Chinese demand that grew 91 per cent. Volumes for Tata Motors India fell four per cent to 190,483 units because of a slowdown in medium and heavy commercial vehicles and passenger cars sales.
After its acquisition in 2008, Tata Motors revived JLR quickly. JLR contributed 65 per cent of the revenues of the firm and a whopping 90 per cent of its profits in April-June.
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During the quarter, Tata Motors said its stand-alone profit was Rs 205.34 crore against Rs 401.28 crore a year ago. Consolidated net profit, which included the Rs 2,067 crore of JLR, rose to Rs 2,245 crore, up 12 per cent. Revenu in the Indian market was also down by over Rs 1,000 crore whereas JLR posted a 35 per cent jump in its revenue.
| ACQUISITION GAIN Companies salvage their poor performance back home through acquisitions | ||||
| Company | Foreign acquisition | Amount | Year | Benefits |
| Hindalco Industries | Novelis | Rs 33,000 cr | 2007 | Hindalco raised Rs 22,000 crore from Novelis and took back Rs 9,350 crore to fund its expansion projects worth Rs 23,000 crore in India. |
| Tata Motors | Jaguar Land Rover | $2.3 bn | 2008 | JLR earned 65% of the revenue of Tata Motors and 90% of its profits in the June qtr |
| Suzlon Energy* | REPower | NA | --- | The subsidiary forms 67% of the total Rs 39,700 crore order book of Suzlon |
| Tata Power | Bumi Resources** | Rs 6,000 cr | 2007 | The two mines’ earnings have been fuelling Tata Power’s balance sheet by contributing about 30% of its revenues |
| * Suzlon took four years to buy REPower. It began in April 2007 by acquiring a 7.7% stake and gradually expanded its holding; ** Tata Power picked 30% in two mines of Bumi resources | ||||
Suzlon- REPower
An acquisition that took four years to complete, RE Power is the one growing business for Suzlon. Though REPower might not be adding to Suzlon’s profit at the moment, the subsidiary forms 67 per cent of the total Rs 39,700 crore order book of the company.
Moreover, REPower is a debt-free company and the entire Rs 11,120 crore debt is on the books of Suzlon. The company is looking to raise debt or equity on its international assets to give the Indian parent some breathing space. Suzlon has also said it was actively looking to sell non-core assets and even raise money on its international operations.
On a stand-alone basis, the last time Suzlon reported profit was in the June 2011 quarter at Rs 110 crore. In the June 2012 quarter, Suzlon reported a stand-alone loss of Rs 697 crore, more than the entire loss of the year ended March 2012 at Rs 505 crore.
Although, on a consolidated basis (including REPower), Suzlon’s net loss widened to Rs 851 crore for the quarter, the company blames the historically slower first quarter for depreciating performance.
In the March quarter, the company posted a stand-alone loss of Rs 309 crore against a consolidated loss of Rs 182 crore. The consolidated loss for FY12 was Rs 369 crore against Rs 505 crore standalone loss. This shows that barring the June quarter of the current fiscal, REPower has been able to bring down the losses for the parent.Tata Power- Bumi Resources
Tata Power Co Ltd had acquired a 30 per cent stake in two mines of Indonesian firm PT Bumi Resources Tbk in early 2007 for a whopping Rs 6,000 crore. Both mines, PT Kaltim Prima Coal and PT Arutmin Indonesia, were meant to ensure coal supply to its ultra mega power project in Mundra, Gujarat. Much before the Mundra project was commissioned, the coal mines’ earnings have been fuelling Tata Power’s balance sheet, by contributing to around 30 per cent of its revenues.
However, the consolidated net profit of Tata Power fell 66 per cent to Rs 146 crore in the June quarter because of the fall in coal prices. Its profit before interest and tax from coal companies were down to Rs 257.6 crore, compared with Rs 750 crore a year ago.
This wasn’t the case when the coal prices were on the upswing. For 2011-12, Tata Power’s coal earnings very high, owing to the spike in international coal prices. The other income showed a growth of 99 per cent to Rs 983 crore against Rs 493.5 crore in the previous year. This was due to higher dividend income from coal companies, along with others like forex gains and higher treasury income.
In 2007, months after Tata Power bought the stake, Bumi had reported a 255 per cent jump in its net income to Rs 3,156 crore against just Rs 888 crore in 2006. This was because of the hike in coal prices. Therefore, any spike in coal prices will result in equally dramatic jump in profit numbers of Tata Power.