An overwhelming majority of balance sheets of Indian companies, including not a few in the public sector, come as a big disappointment to the stakeholders. So many annual reports say so little of substance and the chapter on management discussion and analysis lacks criticality and depth that they offer little guidance as to the future working of companies and prospects of industries in which they operate. Fortunately, in the commodities space we have got Hindalco Industries and Tata Steel, where the managements have made it a virtual religion to dish out information and analysis, proving to be a delight for shareholders and commentators alike.
Going beyond the ritual of balance sheets, Hindalco and Tata Steel have put their websites and analysts meet to good effect to establish a link with the wider public. What is Hindalco? Is it only a national major in aluminium and copper? No, Hindalco at consolidated level, says chairman Kumar Mangalam Birla, is “global in size and reach” with sales outside India having a 76 per cent share of the total $12.8 billion. Thanks largely to its $6-billion acquisition of Novelis, the world leader in aluminium rolled products and scrap recycling in 2007, and also because of its ownership of copper business in Australia, 61 per cent of Hindalco assets are to be found outside India.
Like some other corporate houses here, notably the Tatas and Reliance, Aditya Birla group seized by business wanderlust is to catapult itself to a $65-billion conglomerate in the next five years. And in this journey, informs Birla, the group flagship Hindalco will walk tall.
This bit of information underpins the group’s faith in the two non-ferrous metals, both as commodity and value added aluminium products. By 2014, Hindalco will be investing Rs 40,000 crore in five greenfield alumina and aluminium projects in Orissa, Jharkhand and Madhya Pradesh. The company got a toehold in Orissa in 2000 when acquisition of Alcan’s Indian subsidiary Indal gave it ownership of the smelter and a captive power unit in Hirakud. Who could then have thought that Hindalco will be expanding Hirakud smelter a few times over to 360,000 tonnes and its captive power complex to 967.5 Mw. This is how shareholder value should be enhanced post acquisition.
Hindalco has its mother and much bigger aluminium smelter at Renukoot in Uttar Pradesh which has the advantage of a highly efficient power complex at nearby Renusagar virtually next to Singrauli coal pithead. But unlike Nalco, which ferries bauxite through a 14.6 km long cable belt conveyor from mines in Panchpatmali hills to the refinery at Damanjodi, virtually a cost-free operation, Hindalco has to negotiate the logistical challenge of sourcing bauxite from multiple sources to feed its three refineries and still keep costs low. Alumina and power combined constitutes over 70 per cent of metal production cost.
According to Birla, Hindalco will be a 1.8-million-tonne aluminium company a few years down the road. Such capacity to be realised mainly through greenfield investments and also by adding extra capacity to operating smelters will allow Hindalco to find a seat in that charmed table now adorned by the likes of Rusal, Alcoa, Rio Tinto, Chalco and Hydro. A company seeking to achieve so much in aluminium within the country will perforce be in Orissa in a big way. After all, Orissa has 59.5 per cent of the country’s bauxite reserve and 24.8 per cent of coal deposits. Equally importantly, Orissa bauxite is rich in aluminium content of over 40 per cent and mercifully with low traces of silica.
No surprise, therefore, Hindalco is building Utkal Alumina and Aditya Refinery, each with capacity of 1.5 million tonnes and also Aditya Aluminium which will have a fully power backed 359,000-tonne smelter, all in Orissa. Hindalco is also to build identical capacity smelters in Madhya Pradesh and Jharkhand.
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Managing director D Bhattacharya’s analysis, part of the balance sheet, shows the massive new capacity is being built on the solid foundation of “the Ebit margin of our aluminium business is among the highest relative to domestic and global peers.” Hindalco is counted among the top quartile in global cost competitiveness. As it pursues “continuous reduction in conversion cost” in the face of rising input cost pressures, says Bhattacharya, Hindalco remains attentive to “portfolio derisking.”
A company of Hindalco’s size should necessarily have a clearly defined growth and operation strategy. Birla says Hindalco’s one relates to building an “extremely volatile yet high profit upstream business and a relatively low margin but stable downstream businesses of Novelis as well as copper.” As proof, we have seen how rapid demand fall in the latter part of 2009 shaved aluminium prices by over half. But there is recovery since and the three-month LME is now around $2,110 a tonne.
Hindalco’s move to convert a growing proportion of the primary metal into value-added products, no doubt Novelis acquisition will continue to add sheen to Hindalco’s local portfolio of flat-rolled products. Hindalco has effected a resounding turnaround of Novelis. For that however, there is no management betrayal of triumphalism.