| The Boston Red Sox is not your average American baseball club. It uses SWOT (strengths, weaknesses, opportunity and threat) analysis to ascertain the abilities of its opponents and empowers its own players to tackle them. Eighteen months ago, Debu Bhattacharya, the managing director of Hindalco, a flagship company of the Aditya Birla Group, launched Operation Red Sox to identify an opportunity that would make the company a world leader in metals and catapult the Group into the Fortune 500 league. Opportunity came in the form of the US-based Novelis, the world leader in flat rolled products (FRP), and a subsidiary of Alcan, the world leader in bauxite, alumina and aluminium. On February 11, when the Novelis board sent a letter accepting Hindalco's bid for $6 billion (Rs 26,500 crore), the operation was declared successful. Currently Hindalco is the world's ninth largest copper producer with a capacity of 0.5 million tonne per annum (mtpa), and Asia's fourth largest aluminium producer with a capacity of 0.4 mtpa. The acquisition will make Hindalco the world's largest aluminium rolling company, and fifth largest integrated aluminium player, pushing up the Group's turnover to $21 billion (Rs 92,700 crore). In addition, it will give Hindalco room to bring superior FRP technology, used to manufacture cans and in packaging and transportation, to India. Cola majors in India import cans from South Korea despite the high cost of freight. The acquisition will prepare Hindalco to cater to the needs of the Indian industry, including its demand for railway rakes, and reduce its exposure to volatile prices and cyclicality. Hindalco is the lowest-cost aluminium producer in the world. Over the past five years, its revenues from finished products have risen to 60 per cent of its total turnover in India. After this acquisition, Hindalco will become the world number one in the FRP space and will supply to global majors like Coke, Pepsi, Budweiser, GM, Ford and Toyota. At present, an average of 1 kg of aluminium is consumed per head in India, while in China, it is 6 kg. Consumption in India will increase if the product is available locally. If consumption picks up from 1 kg to 3 kg by 2010, India will need to manufacture 1.5 million tonne of FRP to meet the demand in five years. Says, Bhattacharya, "A downstream business gives constant profitability."  | | | | | The deal takes Aditya Birla Group's turnover from $12 bn (Rs 53,000 crore) to $21 bn (Rs 92,700 crore) It paves way for the Group's entry into the elite Fortune 500 club The deal makes Hindalco the world's largest aluminium rolling company and the fifth largest integrated aluminium player Novelis will enable Hindalco's entry into downstream business, from cans to cars and railway rakes, and help Hindalco ride volatility in prices The size of acquisition and the cash outflow could impact Hindalco's risk profile | | Markets, though, have given the deal a thumbs-down, as the size of Novelis is thrice that of Hindalco. CRISIL has given an outstanding long-term rating of 'AAA/Stable' to Hindalco, on 'Rating Watch with Negative Implications'. The short-term rating of 'P1+' has been reaffirmed, following Hindalco's offer to buy 100 per cent of the equity of Novelis at a cost significantly higher than the company's net worth of about Rs 9,500 crore (as on March 31, 2006). Hindalco will primarily fund it through debt, which will have an adverse impact on its capital structure. It will take a loan of $2.8 billion (Rs 12,400 crore) guaranteed by itself, and another $2.8 billion with recourse to Novelis. Says Ramdeo Agarwal, partner, Motilal Oswal Securities, "You either buy assets cheap or you buy exotic growth, but this is a case of pledging of cashflows by an Indian company to buy assets which are neither cheap nor growing." However, Group Chairman Kumar Mangalam Birla says a premium of 15 per cent for acquiring the company is a "fair price" to pay for growth and market leadership. The debate is really on short-term concerns and long-term potential. Novelis entered into contracts with cola companies, among others, to supply aluminium at a price of $1,400 (Rs 61,790) per tonne. But since then, prices have shot up, affecting its profitability. The last of the contracts will come to an end by 2010. While markets are taking a short-term view of this, Birla has canned the deal keeping in mind the big picture. | | INTERVIEW | KUMAR MANGALAM BIRLA | | | "It is important to gain global presence"
The chairman of the Aditya Birla Group spoke to INDIA TODAY on the Group's acquisitions, the importance of moving up the value chain, and the recent trend of big overseas mergers. Excerpts. Q. Why are markets penalising Indian companies that are making big acquisitions abroad? A. The markets probably took a short-term view of the acquisition, while we see long-term value. The Indian market has growth potential. We have bought many companies and assets in India, including Indal, rolling assets of Pennar Aluminium and extrusions press from the erstwhile Sangam Aluminium. Q. Why was it so important for Hindalco to go looking for a company like Novelis and to acquire it? A. Novelis, with a 19 per cent global market share, is a leader in the aluminium flat rolled business. The Hindalco-Novelis combine helps establish a global integrated aluminium producer with low-cost alumina and aluminium production facilities and high-end rolled production capacity. Q. Do you think Indian companies are getting carried away in their acquisition spree? A. Global acquisitions are integral to go up the value chain. In aluminium one needs to invest in downstream to go up the value chain. India does not offer suitable downstream opportunities on a global scale. This acquisition makes Hindalco a global leader in aluminium. In the current metals environment, it is important to gain global presence and penetrate growing markets in order to take Hindalco to the next level. Q. Critics of big mergers feel there are so many opportunities in India but India Inc is looking for growth overseas. A. We look at various aspects of possible acquisitions before deciding. We have made significant acquisitions both in India and overseas. In India, we acquired Shree Digvijay Cements, L&T's cement division (now UltraTech), Madura Garments and PSI Data Systems. Our acquisitions overseas include Antholville Pulp Mill, Nakawick Pulp Mill, Mount Gordon Copper Mines, Nifty Copper Mines and Minacs, a BPO firm.
| | Index |
