1

Financial Statement of Pre & Post Acquisition Stage of Hindalco Industries Limites

Summer Internship Project Report Submitted towards Partial Fulfilment Of Post Graduate Diploma in Management (Approved by AICTE, Govt. of India) Academic Session 2010-12

Submitted By:

Mannu Kumar Saini

Roll No- BM 010178 Under the Guidance of: Industry Guide: Mr. Vimal Raheja Sr. Manger (Accounts) Hindalco Industries Ltd. Faculty Guide: Mrs. Nandita Mishra Associate Faculty IMS, Ghaziabad

ACKNOWLEDGEMENT
No matter how one tries to limit ones feeling to bind in words, they cannot prove to a true measure of what is felt. HINDALCO INDUSTRY LTD. Was our wonderful experience. It offered us an insight into the working of the industry. The experience we had there was something which no book can replace, be it the interaction with the staff or the training sessions. I would like to thank Mr. Ajay Joshi, Asst. Vice President (Finance & Accounts) for giving me a chance to work with this organization and for extending the words of encouragement and wisdom. I am also thankful to Mr. Gopal Purohit, General Manager (Fin. & A/Cs), Mr. Vineet Bhatnagar, Asst. General Manager (Accounts) and to all the members of the Finance & Accounts Department. I would like to thanks Mr. Vimal Raheja, Sr. Manager (Finance & Accounts) His valuable guidance and constant encouragement have helped me tremendously in the completion of this project. I would also like to extend a word of gratitude to Mr. S. K. Das, General Manager (T & D) for having arranged my training in this organization. I am indebted to all the field operators who took time off from their busy working schedule and explained me even the minutest details, ensuring my queries and showing me the whole periphery of the PLANT. Last but not the least we would like to thanks our teachers without whose feedback and encouragement, this project would not have been possible. There help has gone a long way in successful completion of my project in an organisation, be it an industry, a college or society, no outcomes can be achieved by that we received from this organisation. Debts being various are not easy to remember. Therefore finally, i express my best gratitude to all who have directly or indirectly assisted, guided and supported me in completing this task. My special thanks to my friends for constant support and feedback that has enabled to perform this dissertation .Date Mannu kumar Saini

PREFACE
The report is hard intends to reflect some financial management issues covered under the HINDALCO EXTRUSIONS a first truly MNC of India. The total aspects have been formulated and presented on the basis of ideas and information gathered by this investigator during a shorter span of project training i.e. an important portion of the MBA curriculum leading to an opportunity for the participant to have a practical exposure of the content under the topic beyond what has already been studies during the classroom interaction. This report has been written in response to a comprehensive study conducted on FINANCING STATEMENT OF PRE & POST ACQUISITION STAGE of HINDALCO INDUSTRIES LIMITED. This report mentions and evaluates the various aspects, pertaining to the distribution channel of the company. After a thorough analysis of the various facts stand figure, a set of recommendation has been given at the end of report. Accuracy and precision has been given the prime consideration, while compiling the report, the authoritative and authentic. We are confident that anyone who goes through this report will learn how much we learnt and benefited during this period.

Mannu kumar saini IMS GHAZIABAD

TABLE OFCONTENT PAGE NO. EXECUTIVE SUMMARY........................................................................................ INTRODUCTION..................................................................................................... Objectives of the Study.................................................................................. Study Design and Methodology.................................................................... Limitations..................................................................................................... 1 5 6 7 8

CHAPTER 1 .................................................................................................................... INDUSTRY PROFILE..................................................................................

Aluminium Industry in INDIA............................................................................. The Background ................................................................................................... Aluminium Production in India............................................................................ The Production........................................................................................................ The Consumption..................................................................................................... Analysis of Indian Primary Aluminium Market.....................................................

9
9 9 10 10 10 13

CHAPTER 2 ....................................................................................................................... COMPANY PROFILE...................................................................................................... Introduction on Hindalco Industry Limited .......................................................... Management Team............ ................................................................................... Hindalco SWOT Analysis..................................................................................... Introduction on Novelis Inc. .................................................................................... 17 17 24 25 26

CHAPTER 3 ............................................................................................................................ HINDALCO- NOVELIS ACQUISITION........................................................................... Merger and Acquisition... ......................................................................................... Motive behind M &A ................................................................................................ Important Facts About Deal........................................................................................ Funding Structure For The Deal................................................................................. Strategic Rationale For Acquisition ............................................................................ Valuation For Acquisition............................................................................................. Financial Challenges For The Acquisition.................................................................... 29 29 30 32 33 34 36 38 39

CHAPTER 4 ............................................................................................................................. FINANCIAL ANALYSIS Ratios And Statistics .................................................................................................... Financial Highlights ...................................................................................................... Financial Review ........................................................................................................ Ratio Analysis .............................................................................................................

39 40 46 48

CONCLUSION CHAPTER 5.....................................................................................................................68 Future Outlook...................................................................................................................69

o BIBLIOGRAPHY ..............................................................................................................70

EXCECUTIVE SUMMARY

We look upon the aluminium business as a core business that has enormous growth potential revenues and earnings, our vision is to be a premium metals major, global in size and reach.....The acquisition of Novelis is a step in this direction -Kumar Mangalam Birla, Chairman, Hindalco Industries

Last decade witnessed growing appetite for takeover by Indian corporate across the globe as a part of their inorganic growth strategy. In this chain Indian aluminium giant Hindalco acquired Atlanta based company Novelis Inc, a world leader in aluminium rolling and flat rolled aluminium products. Hindalco Industries Ltd., acquired Novelis Inc. to gain sheet mills that supply can makers and car companies. Strategically, the acquisition of Novelis takes Hindalco onto the global stage as the leader in downstream aluminium rolled products. The transaction makes Hindalco the worlds largest aluminium rolling company and one of the biggest producers of the aluminium in Asia, as well as being Indias leading copper producer. The Project Report attempts to analyze the financial and strategic implication of this acquisition for the shareholders of HINDALCO. It explains the acquisition deal in the detail and compares the pre and post acquisition stage. Following are the main issues to be discussed for critical review of this Report. What is the strategic rationale for this acquisition? Were the valuation for this acquisition was correct? What are financial challenges for this acquisition? What is the future outlook of this acquisition?

Mergers and Acquisition have been the part of inorganic growth strategy of corporate worldwide. Post 1991 era witnessed growing appetite for takeovers by Indian corporate also across the globe as apart their growth strategy. This series of acquisitions in metal industry was initiated by acquisition of Arcelor by Mittal followed by Corus by Tatas. Indian aluminium giant Hindalco extended this process by acquiring Atlanta based company Novelis Inc, a world leader in aluminium rolling and flat-rolled aluminium products. Hindalco Industries Ltd., acquired Novelis Inc. to gain sheet mills that supply can makers and car companies. Strategically, the acquisition of Novelis takes Hindalco onto the global stage as the leader in downstream aluminium rolled products. The acquisition of Novelis by Hindalco bodes well for both the entities. Novelis, processes primary aluminium to sell downstream high value added products. This is exactly what Hindalco manufacture. This makes the marriage a perfect fit. Currently Hindalco, an integrated player, focuses largely on manufacturing alumina and primary aluminium. It has downstream rolling, extruding and foil making capacities as well, but they are far from global scale. Novelis processes around 3 million tonnes of aluminium a year and has sales centres all over the world. In fact, it commands a 19% global market share in the flat rolled products segment, making it a leader.

Hindalco has completed this acquisition through its wholly-owned subsidiary A V Metals Inc and has acquired 75.415 common shares of Novelis, representing 100 percent of the issued and outstanding common shares A V Metals Inc transferred the common shares of Novelis to its wholly-owned subsidiary A V Aluminium Inc. The deal made Hindalco the worlds largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia, as well being Indias leading copper producer. Hindalco Industries Ltd has completed its acquisition of Novelis Inc under an agreement in which Novelis will operate as a subsidiary of Hindalco.

Kumar Mangalam Birla- controlled Hindalco Industries, the countrys largest aluminium producer, recently announced the acquisition of Atlanta-based Novelis for an enterprise value of nearly $6 billion in cash, which will help it gain large customers like coca-cola, Ford and General Motors. Codenamed project Red Sox , the deal envisages a payment of $44.93 per
8

share; which is 16.5 per cent more than its last closing prise, to Novelis shareholders, amounting to a total of $3.5 billion. In addition, Hindalco will take on its books Novelis debt of $2.4 billion. Following the transaction Hindalco, with Novelis will be the worlds largest aluminium rolling company, one of the biggest producers and Indias leading copper producer. The acquisition, which requires a approval of 66% of Novelis shareholder, is expected to be completed by second quarter of 2007. The Novelis board has recommended the offer to its shareholder, largely financial institutions.

Speaking about the acquisition Mr. Kumar Mangalam Birla, chairman of Aditya Birla group, commented The acquisition of Novelis is a landmark transaction for Hindalco and Group. It is in line with our-term strategy 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 aluminium producer with low-cost alumina and aluminium production facilities combined with high-end aluminium rolled product capabilities. The complementary expertise of both this company will create and provide a strong platform for sustainable growth and ongoing success.

Acting chief Executive officer of Novelis, Mr. Ed Blechschmidt commented after the acquisition formalities were complete, After careful consideration, the board has unanimously agreed that this transaction with Hindalco delivers outstanding value to Novelis shareholder. Hindalco is a strong dynamic company. The combination of Noveliss worldclass rolling assets with Hindalcos growing primary aluminium operation and its downstream Fabrication assets in the rapidly growing Asian market is an exciting prospect. Hindalcos parent, the Aditya Birla Group is on the largest and most respected business group in India, with growing global activity and long-term business view.

Mr. Debu Bhattacharya, Managing Director of Hindalco and Director of Aditya Birla Management Corporation Ltd., said, there are significant geographical market and product synergies. Novelis is the global leader in aluminium rolled product and aluminium can recycling, with a global market share of about 19 per cent. Hindalco has a 60% share in the currently small but potentially high growth Indian market for rolled product. Hindalcos
9

position as one of the lowest cost producer of primary aluminium in the world is leverageable into becoming a globally strong player. The Novelis acquisition will give us immediate scale and a global footprint.

HINDALCO ENTERS THE BIG-LEAGUE The acquisition will catapult the group into the fortune 500 league, three year ahead of the target. The combination of Hindalco and Novelis will establish a global integrated aluminium producer. Birla said. Spurred by an economy growing at more than 9% a year and the countrys recent rating upgrade, Indian companies are seeking acquisition in mature overseas market to sell higher-margin goods and add capacities and products.

PURPOSE OF THE ACQUISITIO This acquisition was a very good strategic move from Hindalco. Hindalco will be able to ship primary aluminium from India and make value-added products. The combination of Hindalco and Novelis will establishes an integrated producer with low-cost alumina and aluminium facilities combined with high-end rolling capabilities and a global footprint. Hindalcos rationale for the acquisition is increasing scale of operation, entry into high-end downstream market and enhancing global presence. Novelis is the global leader (in terms of volume) in rolled products with annual production capacity of 2.8 million tones and a market share of 19 per cent. It has presence in 11 countries and provides sheets and foils to automotive and transportation, beverage and food packaging, construction and industrial, and printing market. Hindalcos rational for the acquisition in increasing scale of operation, entry into high-end downstream market and enhancing global presence. Acquiring Novelis will provide Aditya Birla Groups Hindalco with access to customers such as General Motors Corp. and CocaCola Co.

The merger looks not bad if the current financial valuation is ignored. Also we need to keep in mind that Hindalco is a very aggressively growing company, for it to build infrastructure that can match Novelis is very difficult.

10

INTRODUCTION
On 10 February 2007, Hindalco entered into an agreement with Novelis to acquire the company in an all-cash transaction which values Novelis at approximately US$ 6.0 billion, including debts. Under the terms of agreement, Novelis shareholders will receive US $ 44.93 in for each outstanding common share. Novelis shareholders approved the transaction by an overwhelming majority (99.8 per cent) in a special meeting on 10 May 2007. The combination of Hindalco and Novelis will establishes an integrated producer with lowcost alumina and aluminium facilities combined with high-end rolling capabilities and a global footprint. The complementary assets and expertise of the tern provide a strong platform for growth and success, added Mr.Birla. Mr. D Bhattacharya, managing director of Hindalco and director of Aditya Birla Management Corporation said, Novelis makes a perfect fit for Hindalco. There are enormous geographical market and products synergies. Novelis is the global leader in the value-added high-end aluminium rolled products and aluminium can recycling. Hindalco is consistently increasing its share of value added products, which today stand 60 per cent. The Novelis acquisition gives it an instant leg-up with its technologically sophisticated rolled aluminium products capabilities, apart from a scale and a global footprint.

11

OBJECTIVES OF THE STUDY

Identifying the strategic rational or purpose behind the deal, i.e., why Hindalco acquired Novelis. Analyzing the financial statement of the pre and post acquisition stage. 2007-2008 & 2008-2009 are the post acquisition stage. Analyzing the implication of the deal on the financial position of Hindalco by comparing the statement of the three financial years. Analysis on the basis of Ratio Analysis, providing a clear picture about the deal and its effects on the financial position of Hindalco. Identifying the future outlook the acquisition from Hindalcos point of view.

12

PLACE OF STUDY
The project study is carried out at the Finance Department of HINDALCO INDUSTRIES LIMITED situated at Renukoot , UTTAR PRADESH. The study is undertaken as a part of the MBA curriculum from 20th April 2011 to 20th June 2011 in the form of summer placement.

STUDY DESIGN AND METHODOLOGY

Two types of data are collected, one is primary data and second one is secondary data. The primary data were collected from the Department of finance, HINDALCO Industries, Renukoot. The secondary data were collected from the Annual Report of HINDALCO, HINDALCO website, NOVELIS website, etc.

13

LIMITATION
There are few limitations to this study because of following: The duration of summer training was too doing the financial analysis of two companies. The fluctuation in the exchange rate may not give the actual position of the financial statement. Financial statement of NOVELIS Inc. was not available at Renukoot office.

14

INDUSTRY PROFILE
ALUMINIUM INDUSTRY IN INDIA Aluminium Industry in India is a highly concentrated industry with the top 5 companies constituting the majority of the countrys production. With growing demand of aluminium in India, the Indian aluminium industry is also growing at an enviable pace. In fact, the production of aluminium in India is currently outpacing the demand. Though Indias per capita consumption of aluminium stands too low (under 1 kg) comparing to the per capita consumption of other countries like US & Europe (range from 25 to 30 kgs), Japan (15 kg),Taiwan(10 kg), China (3 kg), the demand is growing gradually. In India, the industries that require aluminium include power, consumer durables, transportation, construction and packaging etc. THE BACKGROUND Though the existence of Aluminium was first establish in the year 1808. It looks almost 46 year to make its production commercially viable. The research work of several year resulted in extracting the aluminium from the ore. Aluminium is third most available element in the earth constituting almost 7.3% by mass. Currently it is also the second most used metal in the world after steel. Due to the consistent growth of Indian economy at a rate of 8%, the demand for metals used for various sector, is also on the higher side. As a result, the Indian aluminium industry is also growing consistently. In FY09, the aluminium industry in India saw a growth of about 9%. The production of aluminium started in India in1938 when the Aluminium Corporation of Indias plant was commissioned. The plant which was set up with a financial and collaboration with Alcan, Canada had a capacity of producing 2500, ton per annum. Hindustan Aluminium Corporation (Hindalco) was set up in UP in the year 1959; it had a capacity of producing 20,000 ton per annum. In 1965, a public sector enterprise Malco which had a capacity of 10,000 ton per annum was commissioned; by 1987 National Aluminium Company (NALCO) was commissioned to produce aluminium. It had capacity of producing 0.218 million ton.

15

ALUMINIUM PRODUCTION IN INDIA India is worlds fifth largest aluminium producer with an aluminium production competence of around 2.7 million tones, according almost 5%nof the total aluminium production in the world. India is also a huge reservoir of Bauxite reserve of 3 billion tones. THE PRODUCTION India lies at the eighth position in the list of leading primary aluminium producers in the world. India saw a significant growth in aluminium production in the past five year. In 20062007, the production target of aluminium in India laid by the Ministry of Mines, Government of India was 1,153KT, which was augmented to 1,237 KT in the next year (2007-2008). Due to the growing demand from the construction, electrical, automobiles and packaging industry, the production of aluminium also hiked up. In FY 09, the total aluminium production in India was around 1.35 tonnes. THE CONSUMPTION After a stagnant consumption of aluminium in India from the end of 1990s to 2002 (when the consumption were between 500-600 KT), it started rising sharply since 2002. The consumption reached at 1,080 KT in 2006. The consumption of aluminium in India is dominated by the industries like power, infrastructure, and transportation etc.

The Indian aluminium industry is dominated by four or five companies that constitute the majority of Indias aluminium production. Following are the major player in the Indian aluminium industry: Hindalco Industries Ltd. National Aluminium Company Ltd.(NALCO) Vedanta Recourse Bharat Aluminium Company Ltd.(BALCO) Madras Aluminium Company Ltd.(MALCO)

Jindal Aluminium Ltd.

16

HINDALCO: Hindalco is the biggest player in the aluminium industry in India with around ---- of market share. An Aditya Birla Group flagship company, Hindalco has its aluminium plant at Renukoot in Uttar Pradesh. It has various aluminium products with a market share of 42% in primary aluminium, 20% in extrusions 63% in rolled products, 31% in wheels and 44 in foils.

NALCO: It is also one of the leading aluminium producers in India. Government of India has a stake of 87.15 in this company. Its aluminium refinery is located at Damanjodi. It also has a smelter located in Angul, Orrisa. Currently, NALCO is concentrating on a capex programmed to increase its production from 345,000 tons to 460,000 tons.

VEDANTA RESOURSE is an LSE-listed diversified FTSE 100 metals and mining company, and Indias largest non-ferrous metals and mining company based on revenue. In addition, we have additional assets and operation in Zambia and Australia. We are primarily engaged in copper, zinc, aluminium and iron ore businesses, and are also developing a commercial power generation business.

Bharat Aluminium Co. Ltd. (BALCO): It is part of Vedanta Resources. It was incorporated in the year 1965 as a Public Sector Undertaking (PSU). It is the first public sector enterprise in the country which started producing aluminium in 1975. Till 2001, BALCO was a public sector enterprise owned 100% by Government of India. In the year 2001, Gol divested 51% equity and management control in favour of Sterlite Industries (Vedanta) Limited.

The Madras Aluminium Company Ltd. (MALCO): It is part of Vedanta resource, MALCO is a primary in south india with operations encompassing mining, refining, smelting and power generation, MALCO is surging a head to achieve global recognition in aluminium production.

17

Jindal Aluminium Ltd.: established way back in 1968, is leading manufacturer of aluminium extruded profile in India. Located in the serene outskirts of Bangalore city, JAL is the only aluminium company in India having 6 aluminium extrusion presses under one roof and achieving highest in the country

Table 1 Reporte (Thousands of PERIOD Metric Primary Latin Africa 2006 2007 2008 2009 2010 1864 1815 1715 1681 425 North Asia 3493 3717 3923 4401 1207 West Europe 4182 4305 4618 3722 910 Aluminium East/Central Europe 4230 4460 4658 4117 1017 Oceania 2274 2315 2297 2211 555 Total 23869 24812 25654 23399 5846 Production Daily Average 65.4 68 70.1 64.1 65

Tons)

America America 5333 5642 5783 4759 1164 2493 2558 2660 2508 586

18

Fig 1

6000

5000

4000

Series1 Series2

3000

Series3 Series4

2000

Series5

1000

0 1 2 3 4 5 6 7

Analysis of Indian Primary Aluminium Market Type of Market The primary Aluminium production market in India is an oligopolistic market. The primary aluminium is a homogenous product. As the product is homogenous we can term the market as Pure Oligopoly. Though there are some grades in aluminium based on aluminium

concentration like (Electrical conductivity) Grade, etc but there are very less difference in the quality of the product. There is little or no gap between the demand and supply as the supply just matches the demand. Moreover there is a huge demand from countries like china hence there is not constraint on the number of consumers. There are only 3 players in the aluminium market in India with total production of 1250 KT in 2008. The entry into market is possible but not easy due to the heavy initial capital that is
19

required to setup the plant. As aluminium is a homogenous product there is no price war between the three player and these firms are price takers. Though the company sells the product at price which is decided by them, the firms mostly go by the price on the London Metal Exchange (LME). In the Indian aluminium industry all the firms are price takers and there is no clear leader as all the 3 firms have almost equal market share. The price is decided by demand and supply in the commodity market.

Profile of key Players Table 2 Capacity (ktpa) HINDALCO Sterlite Industries NALCO 471 385 345 Market Share 40% 32% 30%

Fig 2

Market Share
HINDALCO Sterlite Industries NALCO

29%

39%

32%

20

Aluminium Uses by Sector Table 3

INDUSTRY Transport Packaging Construction Machinery Electrical Consumer Durables Other Total

GLOBAL 26% 22% 22% 8% 8% 7% 7% 100%

INDIA 17% 8% 7%

36% 12% 20% 100%

Fig 3

GLOBAL
Transport Machinery Other Packaging Electrical Construction Consumer Durables

7% 8% 8%

7% 26%

22%

22%

21

Fig 4

INDIA
Transport Machinery Other Packaging Electrical Construction Consumer Durables

20% 12%

17% 8% 7% 36%

22

COMPANY PROFILE

Dr. Kumar Mangalam Birla As US $ 29.2 billion Corporation, the Aditya Birla Group is in the league of 500. It is anchored by an extraordinary force of 130,000 employees, belonging to 30 different nationalities across 25 countries. In India, the Group has been adjudged The Best Employer in India and among the top 20 in Asia by the Hewitt/ Economic Times and Wall Street Journal Study 2007. Over 50 per cent of its revenues flow its overseas operations. The Group operates in 25 countries ---India, UK, Germany, Hungary, Brazil, Italy, France, Luxembourg, Switzerland, Australia, USA, Canada, Egypt, China, Thailand, Laos, Indonesia, Philippines, Dubai, Singapore, Myanmar, Bangladesh, Vietnam, Malaysia and Korea.

Globally the Aditya Birla Group is: A metals powerhouse, among the worlds most cost-efficient aluminium and copper producers Hindalco-Novelis is the largest aluminium rolling company. It is one of the three biggest producers of primary aluminium in Asia, with the largest single location copper smelter.

No.1 in viscose staple fiber The fourth largest producer of insulators The fourth largest producer of carbon black The 11th largest cement producer globally, the seventh largest in Asia and the second largest in India. Among the worlds top 15 BPO companies and among Indias top four.

23

In India: A premier branded garments player The second largest player in viscose filament yarn The second largest in the chlor-alkali sector Among the top five mobile telephony companies A leading player in life insurance and assets management Among the top three supermarket chains in the retails business

Rock solid in fundamentals, the Aditya Birla Group nurtures a culture where success does not come in the way of the need to keep learning afresh, to keep experimenting.

24

Fig 5

Visison To be a premium conglomerate with a clear focus on each business

Mission To deliver superior value to our customers, shareholder, employees, and society at large

Values Integrity, Commitment, Passion, Seamlessness,Speed

25

Hindalco Industries Limited

Hindalco Industries is Indias largest Aluminium manufacturing Company and is a subsidiary of the Aditya Birla Group. It is run by one of the worlds youngest billionaires, Mr. K.Birla. An industry leader in aluminium and copper An industry leader in aluminium and copper, Hindalco Industries Limited, the metals Flagship Company of the Aditya Birla Group is one of the worlds largest aluminium rolling companies and one of the biggest producers of primary aluminium in Asia. Establish in 1958, we commissioned our aluminium facility at Renukoot in eastern Uttar Pradesh, India in 1962. Later acquisition and merger, with Indal, Birla Copper and the Nifty and Mt. Gordon copper mines in Australia, strengthened our position in value-added alumina, aluminium and copper products. The acquisition of Novelis Inc. in 2007 positioned us among the top five aluminium majors worldwide and the largest vertically integrated aluminium company in India. Today we are a metals powerhouse with-end rolling capabilities and a global footprint in 12 countries. Our consolidated turnover of USD 15 billion (Rs. 600,128 million) places us in the Fortune 500 league. Hindalcos businessescreating superior value Hindalco is one of the leading producers of aluminium and copper. Our aluminium units across the globe encompass the entire gamut of operation, from bauxite mining, alumina refining and aluminium smelting to downstream rolling, extrusion, foils, along with captive power plants and coal mines. Our copper unit, Birla produces copper cathodes, continuous cast copper rods and other byproducts such as gold, silver and DAP fertilizers. Our copper smelter holds the unique distinction of being among the worlds largest single-location custom smelter. Our units are ISO 9001:2000, ISO 14001:2004 and OHSAS 18001 certified. We have been accorded the star Trading House status in India. Hindalcos aluminium metal is accepted for delivery under the High Grade Aluminium Contract on the London Metal Exchange

26

(LME). Our copper quality standards are also internationally recognised and registered on the LME with Grade A accreditation. ALUMINIUM Hindalcos major products include standard and specialty grade alumina and hydrates, aluminium ingots, billets, wire rods, flat rolled products, extrusions and foil. The integrated facility at Renukoot houses an alumina refinery and an aluminium smelter, along with facilities for the production of semi-fabricated products, namely Redraw, rods, Sheet and Extrusion. The plant is backed by a co-generation power unit and a captive power plant at Renusager to ensure the continuous supply of power for smelter and other operation. A strong presence across the value chain and synergies between operations has given us a dominant share in the value-added products market. As a step towards expanding the market for value-added products and services, we have launched various brands in recent year- Ever last roofing sheets, Freshwrapp kitchen foil and Freshpakk semi-rigid containers. COPPER Birla Copper, Hindalcos copper unit, is located at Dahej in Gujarat, India. The unit has the unique distinction of being one of the largest sngle location copper smelter in the world. The smelter uses state-of the art technology and has a capacity of 500,000. Birla Copper also produces precious metals, fertilizer and sulphuric acid. The unit has captive power plants for continuous power generation and a captive jetty to facililate logistics and transportation. Birla Copper upholds its longstanding reputation for quality copper cathodes and continuous cast copper rods by assuring its management processes meet the highest standard. It has acquired certification such as ISO-9001:2000 (Quality Management System), ISO13001:2004 (Environmental Management System) and OHSAS-18001:2007 (Occupation Health and Safety Management System). MINES Hindalco acquired two Australian copper mines, Nifty and Mt. Gordon, in 2003. The Birla Nifty copper mine consist of an open-pit mine, heap leach pads and a solvent extrusion and electro winning (SXEW) processing plant, which produces copper cathode.
27

The Mt. Gordon copper operation consist of an underground mine and a copper concentrate plant until recently, the operation produced copper cathode through the ferric leach process. In 2004, a copper concentrated was commissioned to provide concentrate for use at Hindalcos operation in Dahej. During FY 2008, Mt. Gordon produced 23,886 tonnes of copper in cathode/concentrate. Both Nifty and Mt. Grodon have a long-term life of mine off-take agreement with Hindalco for supply of copper concentrated to the copper smelter at Dahej. MANUFACTURING LOCATION Hindalco has its manufacturing locations in following places: Renukoot Muri Alupuram Belur Kalwa Kollur Taloja Silvassa Belgaum Hirakud Dahej

Rekukoot Renukoot plant was commissioned in 1962, with one pot line and a smelter of 20,000 tpa capacity. Over the years the plant has increased through various Brownfield expansion and asset sweating measures. Today Hindalco at Renukoot, operates across the aluminium value chain from bauxite mining, alumina refining, aluminium smelting to downsream rolling and extrusion. The integrated facility houses a 70,000 tpa alumina refinery and a 390,000 tpa aluminium smelter
28

along with facilities for production of semi-fabricated products namely conductor redraw rods, sheet and extrusion. In 1967 Hindalco establish a capative power plant at Renusagar, the first captive power plant (CPP) for aluminium industry in India. This along with a co-generation power unit ensures continuous suplly of power for the smelter and other operation. The sprawling 1056 acre Renukoot complex located near the Rihand Dam, 160 kms from the city of Varanasi; include beautifully landscaped gardens with residential colony cum mini township for management and staff members, a full-fledged hospital for employees and the community around along with school, clubhouses, banks sports, culture facilities, supermarkets and the Renukeshwar Mahadev Temple. As a responsible corporate citizen Hindalco Renukoots Company Development Cell plays a leading and exemplary role in social projects on health care, womens empowerment, education and sustainable livelihood schemes and causes such as widow re-marriage and dowery-less marriages. Hindalco Renukoots CSR cell has taken up various innovative rural development projects in 385 neighbouring villages around its operating sites in the states of Uttar Pradesh, Jharkand and Chhattisgrah. These social projects are carried out under the aegis of Aditya Birla Center for Community Intiatives and Rural Development spearheaded by Rajashree Birla.

29

MANAGEMENT

TEAM

Mr. Dillip Gaur, Group Executive Persident, Copper Mr. Shashi k. Maudgal, Chief marketing officer, Aluminium Mr. Satish M. Bhatia, President, Foil and wheel

Hindalcos management team consist of experienced with strong credential. Board of Directors Mr. Kumar Mangalam Birla,

Chairman Mrs. Rajashree Birla Mr. C.M. Maniar Mr. E.B. Desai Mr. S.S. Kothari Mr. M.M. Bhagat Mr. K.N. Bhandari Mr. A.K. Agarwal Mr. N.J. Jhaveri Mr. Debu Bhattacharya, Managing Director

Mr.

R.S.

Dhulkhed,

Senior

President, Operation Mr. Vinod Sood, Joint President, Chemiacals & Intl. Trade Mr. D.K. Kholy, Chief Officer Operation, Renukoot Unit Aditya Aluminium Mr. S.N. Bontha, CEO

Utkal Alumina International Ltd Mr. Suryakant Mishra, CEO

Group Executive President and Chief Financial Officer Mr. S. Talukdar Novelis Inc. Mr. Philip Martens, Persident and Chief Operating Officer Company Secretary Mr. Anil Malik

Chief People Officer Mr. Vineet Kaul

Business / Unit Head

30

Hindalco SWOT Analysis Strengths Cost advantage Asset leverage Effective communication High R&D Innovation Online growth Loyal Customer Market Share leadership Strong management team Strong brand equity Strong financial position Supply chain Pricing Real estate Reputation management Unique products Threats Competition Cheaper technology Economic slowdown External changes(government, Weaknesses Bad communication Diseconomies of scale Over leveraged financial position Low R&D Low market share Not diversified Ubiquitiouegory, products, service

Opportunities Acquisition Asset leverage Financial market (raise money through debts, etc) Emerging market and expansion abroad Innovation Online Product and services expansion Takeovers

political, taxes, etc) Exchange rate fluctuation Lower cost competitors or import Price wars Products substitution

31

Brighter ideas with aluminium

Overview

Novelis is the world leader in aluminium rolling, producing an estimated 19 percent of the world's flat-rolled aluminium products. Novelis is the world leader in the recycling of used aluminium beverage cans. The company recycles more than 35 billion used beverage cans annually. The company is No. 1 rolled products producer in Europe, South America and Asia, and the No. 2 producer in North America. With industry-leading assets and technology, the company produces the highest-quality aluminium sheet and foil products for customers in high -value markets including automotive, transportation, packaging, construction and printing. Our customers include major brands such as Agfa -Gevaert, Alcan, AnheuserBusch, Ball, Coca-Cola, Crown Cork & Seal, Daching Holdings,Ford, General Motors, Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull, Tetra Pak, ThyssenKrupp and others. Novelis represents a unique combination of the new and the old. Novelis is a new company, formed in January 2005, with a new velocity, a new philosophy and a new attitude. But Novelis is also a spin-off from Alcan and, as such, draws on a rich 90-year history in the aluminium rolled product marketplace. Novelis has a diversified product portfolio, which serves to the different set of industries visa vis it has a very strong geographical presences in four continents.

32

Novelis was always a problem child. It was born in early 2005 as a result of a forced spinoff from its parent, the $ 23.6-billion aluminium giant and Canada-based Alcan. In 2003, Alcan won a hostile offer to wed French aluminium company Pechiney. But the marriage produced an unwanted child Novelis. Both Alcan and Pechiney had bauxite mines, facilities to produce primary aluminium, and rolling mills to turn the raw metal into products such as stock for Pepsi and Coke cans and automotive parts. But the US and European antitrust proceedings ruled that the rolled products business of either Alcan or Pechiney had to be divested from the merged entity. Alcan cast out its rolled products business to form Novelis. It is now the worlds leading producer of aluminium-rolled products with a 19 per cent global market share. But in the spin-off process, Novelis ended up inheriting a debt mountain of almost $2.9 billion on a capital base of less than $500 million. That was just the beginning of its troubles. The situation is worse now. Though it marginally reduced debt, it made some losses too. On a net worth of $322 million, Novelis has a debt of $2.33 billion (most of it high cost). Thats a debt-equity ratio of 7.23:1. Soon, the unwanted child stumbled into another crisis. Novelis has a simple business model. It buys primary aluminium, processes it into rolled products like stock for soft drink cans, automotive parts, etc., and sells it to customers such as Coke and Ford. But the management took a wrong call on aluminium prices. In a bid to win more business from soft drink manufacturers, it promised four customers not to increase product prices even if raw material aluminium prices went up beyond a point. A few months after Novelis signed those contracts, aluminium prices shot up 39 per cent (between 30 September 2005 and 2006). To these four customers, Novelis was forced to sell its products at prices that were lower than raw material costs. These four account for 20 per cent of Noveliss $9-billion revenues. But the managements wrong judgement led to losses of $350 million (in 2006). For long, Noveliss former CFO Geoffrey P.Batt, former controller Jo-Ann Longworth and the finance team didnt quantify these losses. After the complicated spin-off from Alcan this involved extensive operations in over 35 plants in 11 countries and four continents the finance team also struggled to file quarterly and annual results on time. Many of the numbers it managed to file on time were wrong and were later re-stated. The board stepped in. First, it replaced its CFO and controller (in December 2005). When that didnt help much, it replaced CEO Brian W. Sturgell in August 2006. (It is still looking for a full-time CEO.) There are many more reasons for the distress in Novelis.

33

More recent expansions were made through both acquisitions and modernization of existing mills, which increased Alcans can stock, sheet and foil rolling capabilities. Novelis was spun off to carry on most of the aluminum rolled products businesses operated by Alcan with an approach to business that is more focused on helping our customers perform and on transforming new ideas into practical product solutions.

Our Alcan roots

Novelis inherited its assets, know-how and structure from Alcan. In 1902, the Canadian subsidiary of the Pittsburgh Reduction Company (later re-named Alcoa) was first chartered as the Northern Aluminum Company, Limited. When Alcoa divested most of its interests outside the United States in 1928, Alcan was formed as a separate company from Alcoa to assume control of most of these interests. In the following years Alcan expanded globally, building or acquiring hydroelectric power, smelting, packaging and fabricated product facilities run by approximately 88,000 employees in 63 countries. The first Alcan rolling operation began in 1916 in Toronto, Canada, with an 84-inch hot mill and three finishing mills. Over the years Alcan constructed a number of mills, including several that are among the largest aluminum rolling operations in each of the geographic regions in which Novelis operates: Oswego, United States (1963) - the hot mill began operations and is now a major producer of can stock and industrial sheet. Norf, Germany (1967) - a joint venture, owned at 50%, operates the worlds largest aluminum rolling mill in terms of capacity. Saguenay Works, Canada (1971) the largest continuous caster in the world in terms of capacity. Pindamonhangaba, Brazil (1977) the only South American plant producing beverage can body and end stock.

The company had 36 operating facilities in 11 countries as of December 31, 2005. The tables below present Net sales and Long-lived assets by geographical area (in millions). Net sales are attributed to geographical areas based on the origin of the sale. Long-lived assets are attributed to geographical areas based on asset location. In 2005, 2004 and 2003, 40%, 41% and 39%, respectively, of our total Net sales were to our ten largest customers.

34

HINDALCO-NOVELIS ACQUISITION
Mergers and acquisition The phrase merger and acquisition (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, or help a growing company in a industry grow rapidly without having to create another business entity. Acquisition An acquisition, also known as a takeover or a buyout or merger, is the buying of one company (the target) by another. An acquisition may be friendly or hostile. In the former case, the companies corporate in negotiation; in the latter case, the takeover target is unwilling to be bought or the targets board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer establish company and keep its name for the combined entity. This is known as a reverse takeover. Another type of acquisition is reverse merger a deal that enables a private company to get publicly listed in a sort time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly listed shell company, usually one with no business and limited assets. The acquisition process is very complex, with many dimensions influencing its outcome. The buyer buys the share, and therefore control, of the target company being purchased. The buyer buys the assets of the target company. The cash the target receives from the sell-off is paid pack to its shareholder by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets.

35

Distinction between Merger and Acquisition Although they are often often uttered in the same breath and used as though they were synonymous, the term merger and acquisition mean slightly different things. When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. A merger happens when two firm agree to go forward as a single new company rather than remains separately owned and operated. This kind of action is more precisely referred to as a merger of equals the firm is often of about the same size. Both companies stocks are surrendered and new company stock is issued in its place. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both if their companies. But when the deal is unfriendly-that is, when the target company does not want to be purchased it is always regarded as an acquisition. Whether a purchase is considered a merger or a acquisition really depends on whether the purchase is friendly or hostile and announced. In the other, words the real difference lies in how the purchase is communicated to and received by the target companys board of directors, employees and shareholder. It is quite normal though for M& A deal communication to take place in a so called confidentially bubble whereby information flows are restricted due to confidently agreement. Motive behind M&A The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve performance. Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate department or operations, lowering the costs of the company relative to the same revenue steam, thus increasing profit margins. Economy of scope: This refers to the efficiencies primarily associated with demand side change, such as increasing or decreasing the scope of marketing and distribution, of different type of products.
36

Increasing revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.

Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the stock brokers customer, while the broker can sign up the banks customer for brokerage accounts. Or, a manufacture can acquire and sell complementary products.

Synergy: For, example managerial economies such as the increased opportunity of managerial specialization. Another example are purchasing economies due to increased order size and associated bulk-buying discounts.

Taxation: A profitable company can buy a loss maker to use the targets loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to shop for loss making companies, limiting the tax motive of an acquiring company.

Geographical or other diversification: This is designed to smooth the earning results of the company, which over the long term smoothen the stock price of a company, giving conservative investors more confident in investing in the company. However, this does not always deliver value to shareholder.

Resource transfer: Recourse are unevenly distributed across firms (Barney, 1991) and the integration of target and acquiring firm recourses can create value through either overcoming information asymmetry or by combining scare recourses.

Vertical integration: Vertical integration occurs when an upstream and downstream firm merger (or one acquire the other). There are several reasons for this to occur. One reason is to internalize externality problem. A common example is of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firm have monopoly power, each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses.

However, on average and across the most commonly studied variable, acquiring firm financial performance does not positively change as a function of their acquisition activity. Therefore additional motives for merger and acquisition that may not add shareholder value include:

37

Diversification: while this may hedge a company against a downstream in an individual industry it fails to deliver value, since it is possible individual shareholder to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger.

Managers:

hubris:

managers

overconfidence

about

expected

synergies from M&A which results is overpayment for the target company. Empire-building: Managers have larger companies to manage and hence more power.

IMPORTANT FACTS ABOUT DEAL Organic and inorganic both strategies have worked for companies worldwide. But in the process of global expansions inorganic growth strategies has always been the first preference for the companies globally. As a part of its inorganic growth strategy of global expansion the following points highlight the important points about this acquisition of Hindalco for this acquisition:

The acquisition of Novelis by Hindalco was in an all-cash transaction, which values Novelis at enterprise value of approximately US $6.0 billion, including approximately US $2.4 billion of debt.

This merger of Novelis into Hindalco will establish a global integrated aluminium producer with low-cost alumina and aluminium production facilities combined with high -end aluminium rolled product capabilities.

After merger Hindalco will emerge as the biggest rolled aluminium products maker and fifth -largest integrated aluminium manufacturer in the world. As Novelis is the global leader in aluminium rolled products and aluminium can recycle, with a global market share of about 19%. Hindalco has a 60% 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 aluminium in the world is leverageable into becoming a globally strong player. The Novelis acquisition will give the company immediate scale and strong a global footprint.

38

Novelis is a globally positioned organization, operating in 11 countries with approximately 12,500 employees. In 2005, the company reported net sales of US $8.4 billion and net profit of US $90 million.

The company reported net sales of US $7.4 billion and net loss of US $170 million in nine months during 2006, on account of low contract prices. Some of these contracts are expected to continue for next Years also.

Novelis is expecting the full year loss to be US $263 million in 2006, however the company is expecting to be in black with US $68 million profit in 2007. The total free cash flow is expected to be US $175 million in 2006.

By January 1, 2010, all the sales contracts will get expired and profitability will increase substantially from then onwards. Novelis will work as a forward integration for Hindalco as the company is expected to ship primary aluminium to Novelis for downstream value addition. Novelis has a rolled product capacity of approximately 3 million tonne while Hindalco at the moment is not having any surplus capacity of primary aluminium. Hindalcos greenfield expansion will give it primary aluminium capacity of approximately 1 million tonne, but this will take a minimum 3-4 years to all the capacities to come into operation. Novelis profitability is adversely related to aluminium prices and higher aluminium prices on LME in near future cant be ruled out. However, we expect the aluminium prices to be softening in long term and this would be positive for Novelis.

Considering these factors, Hindalcos profitability is expected to remain under pressure and this will bounce back in 2009-10. The profitability will be accretive only in 2010-11.

The debt component of Novelis stood at US $2.4 billion and additional US $2.8 billion will be taken by Hindalco to finance the deal. This will put tremendous pressure on profitability due to high interest burden.

Hindalcos existing expansion will cost Rs. 25,000 crore and as a result debt and interest burden of the company will increase further.

FUNDING STRUCTURE FOR THE DEAL The funding structure of this deal is remarkably different from the leveraged buyout model that Tata Steel used to fund the Corus buy. The Tatas are to buy 100 per cent of Corus equity
39

for $12.1 billion. Only $4.1 billion of this is being raised by the Tatas. The remaining $8 billion will be raised (as debt) and repaid on the strength of the Corus balance sheet. Effectively, the Tatas are paying only a third of the acquisition price. This was possible because Corus had relatively low debt on its balance sheet and was able to borrow more. But that is not the case with Novelis. With a debt-equity ratio of 7.23:1, it cant borrow any more. So, the Birlas were unable to do a leverage buyout. To buy the $3.6 billion worth of Noveliss equity, Hindalco is now borrowin almost $2.85 billion (of the balance, $300 million is being raised as debt from group companies and $450 million is being mobilised from its cash reserves). That is almost a third of the Rs 2,500 crore net profits Hindalco may post in 200607. (It has reported a net profit of Rs 1,843 crore for the first three quarters of this year.) The second part of the deal is the $2.4-billion debt on Noveliss balance sheet. Hindalco will have to refinance these borrowings, though they will be repaid with Noveliss cash flows.

ISSUES AND DISCUSSION The case study attempts to analyze the financial and strategic implications of this acquisition for the shareholders of hindalco. The case discusses the acquisition of US-Canadian aluminium company Novelis by India-based Hindalco Industries Limited (Hindalco), a part of Aditya Vikram Birla Group of Companies, in May 2007. The case explains the acquisition deal in detail and highlights the benefits of the deal for both the companies. Followings are the main issues to be discussed for critical review of this case:

What is strategic rationale for this acquisition? Were the valuation for this Acquisition was correct? What are financial Challenges for this Acquisition? What is future outlook for this acquisition?

STRATEGIC RATIONALE FOR ACQUISITION This acquisition was a very good strategic move from Hindalco. Hindalco will be able to ship primary aluminium from India and make value-added products.'' The combination of Hindalco and Novelis establishes an integrated producer with low-cost alumina and aluminium facilities combined with high-end rolling capabilities and a global footprint. Hindalcos rationale for the acquisition is increasing scale of operation, entry into highend downstream market and enhancing global presence. Novelis is the global leader (in terms of

40

volume) in rolled products with annual production capacity of 2.8 million tonnes and a market share of 19 per cent. It has presence in 11 countries and provides sheets and foils to automotive and transportation, beverage and food packaging, construction and industrial, and printing markets. Hindalcos rationale for the acquisition is increasing scale of operation, entry into highend downstream market and enhancing global presence. Novelis is the global leader (in terms of volumes) in rolled products with annual production capacity of 2.8 million tonnes and a market share of 19 per cent. It has presence in 11 countries and provides sheets and foils to automotive and transportation, beverage and food packaging, construction and industrial, and printing markets. Acquiring Novelis will provide Aditya Birla Group's Hindalco with access to customers such as General Motors Corp. and Coca-Cola Co. Indian companies, fueled by accelerating domestic growth, are seeking acquisitions overseas to add production capacity and find markets for their products. Tata Steel Ltd. spent US $12 billion last month to buy U.K. steelmaker Corus Group Plc. Novelis has capacity to produce 3 million tonne of flat- rolled products, while Hindalco has 220,000 tonne .This acquisition gives Hindalco access to higher-end products but also to superior technology,'' Hindalco plans to triple aluminium output to 1.5 million metric tonne by 2012 to become one of the world's five largest producers. The company, which also has interests in telecommunications, cement, metals, textiles and financial services, is the world's 13thlargest aluminium maker. After the deal was signed for the acquisition of Novelis, Hindalco's management issued press releases claiming that the acquisition would further internationalize its operations and increase the company's global presence. By acquiring Novelis, Hindalco aimed to achieve its long-held ambition of becoming the world's leading producer of aluminium flat rolled products. Hindalco had developed long-term strategies for expanding its operations globally and this acquisition was a part of it. Novelis was the leader in producing rolled products in the Asia-Pacific, Europe, and South America and was the second largest company in North America in aluminium recycling, metal solidification and in rolling technologies worldwide. The benefits from this acquisition can be discussed under the following points: Post acquisitions, the company will get a strong global footprint.

After full integration, the joint entity will become insulated from the fluctuation of LME Aluminium prices.

41

The deal will give Hindalco a strong presence in recycling of aluminium business. As per aluminium characteristic, aluminium is infinitely recyclable and recycling it requires only 5% of the energy needed to produce primary aluminium.

Novelis has a very strong technology for value added products and its latest technology Novelis Fusion is very unique one

It would have taken a minimum 8-10 years to Hindalco for building these facilities, if Hindalco takes organically route.

Novelis being market leader in the rolling business, has invested heavily in developing various production technology. One of such technology is a fusion technology that increases the formability of aluminium. This means that it can be better used formed into the design requirement by the car companies. All raw aluminium is processed so that it can be used in products. Fourty percent of the products are rolled products and Novelis is in leader in rolling business with a market share of 20%. Any change in the raw material price is directly passed on to the customers who range from coca cola to automobile companies like aston martin. The current revenue of hindalco is very much dependent on the aluminium prices and when the prices are high they make a larger margin, this not the case with rolling business which usually has a constant margin. For Hindalco to develop such technology will take a lot of time, According to Standard and poors it would take 10 years and $ 12 billion to build the 29 plants that Novelis has with capacity of close to 3 million tonnes. The takeover of Novelis provides Hindalco with access to the leading downstream aluminium player in western markets. The purchase structurally shifts Hindalco from an upstream aluminium producer to a downstream producer. This is reflected in Novelis downstream product capacity of 3.0 mt compared to Hindalcos existing primary capacity of 500 kt. Even with Hindalcos expansion plans to take primary production to 1.5 mt by 2011, the group will remain a downstream aluminium producer. Novelis shareholders are required to approve the deal which the companies expect to be completed by 2007.

VALUATION FOR ACQUISITION The big concern is Noveliss valuation. Analysts believe the Birlas are paying too high a price for a company that incurred a loss of US $170 million for the nine months ended 30

42

September 2006. In its latest guidance, the Novelis management has indicated a loss of US $240 million- 285 million for the whole of 2006. Even in 2005, when Novelis had made a US $90-million net profit, its share prices never crossed US $30. Financial numbers show that novelis is not a good choice by Hindalco at least at the price that they paid for the company. The imediate effect of the merger is that Hindalco would achieve its target of doubling its turnover to $ 20 billion three years in advance. Novelis fits well in the long term strategy of Hindalco. Novelis is not a dying company looking for a savior, Hindalco approached Novelis because they believed that Novelis can give them some business advantage.So, why is Hindalco paying US $44.93 a share for a loss-making company? In its guidance, the Novelis management has indicated a pre-tax profit of US $35 million-100 million for 2007. Going by the optimistic end of the guidance, the price Hindalco paid translates to a market capitalization/profit before tax (PBT) multiple of 36 on Noveliss 2007 forecast. That appears to be high.

Hindalco has long held an ambition to become a leading (top 10) player across its 2 key business segments, aluminium and copper. The acquisition of Novelis should achieve part of this goal by propelling Hindalco to the worlds leading producer of aluminium flat rolled products. With capacity of nearly 3.0 mt of flat rolled aluminium products, Novelis takes Hindalco down thenvalue chain to become a downstream aluminium producer, versus its current upstream focus. At a price of US $44.93/share and assuming US $2.4 bn of debt, Novelis is not coming cheaply. Based on Novelis guidance and consensus forecasts for 2007, we estimate that Hindalco is paying 11.4x EBITDA, 20.7x EBIT or 53.4x PE. At a total enterprise value of US $ 6 billion, Novelis is nearly 50% larger than Hindalcos current market capitalization. The concern is the severity of the earnings and value dilution that will result. Assuming synergies are minimal and based on Novelis guidance for 2007; we calculate that Hindalcos EPS will be diluted by 18%. At Novelis long term annual free cash flow target of US $400m (using a real WACC of 9%), we estimate the acquisition will destroy value by INR60/share. To put it another way, we estimate Hindalco will need to improve annual free cash flow by 35% to US $540m for the acquisition to be value (NPV) neutral. Perhaps the greatest issue with the Novelis acquisition is Hindalcos balance sheet position post acquisition. Having already committed to significant expansion projects, Novelis will push Hindalcos high gearing levels even further. We calculate that Hindalcos gearing (ND/E) will reach 236%, with its Net Debt / EBITDA ratio reaching over 5.0x. In our view, an equity raising is highly possible in the short to medium term. Novelis recently
43

reported a 3Q loss of US $102m. For the nine-months to Sep06, Novelis reported a loss of US $170m. A key factor behind the losses suffered in 2006 was price ceilings contracted to Novelis long-term can-making customers, which impacted revenues by US $350m. Novelis believes that their exposure to these types of contracts will reduce to a maximum of 10% of sales in 2007. While this is comforting, we believe Novelis remains a challenging turnaround prospect. Based on Novelis guidance for 2007 and assuming this is relevant to Hindalcos FY08 period, we calculate Hindalcos EPS will be diluted by 18%.

FINANCIAL CHALLENGES FOR THE ACQUISITION The acquisition will expose Hindalco to weaker balance sheet. Besides the company will move from high margin metal business to low- margin downstream products business, the acquisition will more than triple Hindalcos revenues, but will increase the debt and erode its profitability. The deal will create value only after the Hindalcos expansion completion, and due to its highly leveraged position, expansion plans may get affected. Some of the customers of Novelis are significant to the companys revenues, and that could be adversely affected by changes in the business or financial condition of these significant customers or by the loss of their business. (The companys ten largest customers accounted for approximately 40% of total net sales in 2005, with Rexam Plc and its affiliates representing approximately 12.5% of companys total net sales in that year). Novelis profitability could be adversely affected by the inability to pass through metal price increases due to metal price ceilings in certain of the companys sales contracts.

Adverse changes in currency exchange rates could negatively affect the financial results and the competitiveness of companys aluminium rolled products relative to other materials. The Companys agreement not to compete with Alcan in certain end-use markets may hinder Novelis ability to take advantage of new business opportunities. The end-use markets for certain of Novelis products are highly competitive and customers are willing to accept substitutes for the company products. Though the Hindalco-Novelis acquisition had many synergies, some analysts raised the issue of valuation of the deal as Novelis was not a profit making company and had a debt of US $ 2.4 billion. They opined that the acquisition deal was over-valued as the valuation was done on Novelis' financials for the year 2005 and not on the financials of 2006 in which the company had reported losses.

44

FINANCIAL ANALYSIS

RATIOS AND STATISTICS Statistics: Financial analysis (also referred to as financial statement analysis or accounting analysis) refers an assessment of the viability, stability and profitability of a business, sub-business or project. Continue or discontinue its main operation or part of its business, Make or purchase certain materials in the manufacturing of its products, Acquire or rent/lease certain machineries and equipment in the production of its goods, Issue stocks or negotiate for a bank loan to increase its working capital, Make decisions regarding investing or leading capital, Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business. Hindalcos consolidated Revenue crossed 14.3 USD billion marks during the 2008-2009. It was Rs. 18, 313 crores in 2006-2007, i.e., the pre-acquisition stage. The EBIDTA in 20062007 surpassed US $ 1 billion mark. In 2008-2009 it was 1.3 billion, i.e., Rs. 6046 Crores before adjusting non-cash unrealized derivative loss of Rs. 2381 Crores at Novelis. The Groups has posted a net profit of Rs. 485.31 Crores for the year ended March 31, 2009 as compared to Rs. 2,860.94 crores for the year ended March 31, 2008. In 2006-2007 it was around 2564.3 crores. The total income has increased from Rs. 60,668.86 crores for the year ended March 31, 2008 to Rs. 66,312.98 crores for the year ended March 31st, 2009. With the acquisition of Novelis, Hindalco has become a truly global corporation. Collectively Hindalco and Novelis boast of over 33 plants spanning 13 countries and anchored by a 32000 workforce belonging to over 15 nationalities.

45

Novelis with its value added products and a global leader image, make a perfect fit for Hindalco, The acquisition establishes a global integrated aluminium producers with low cost alumina and aluminium production facilities combined with high-end aluminium rolled products. It expands companys involvement in the downstream markets. Following is the comparative statement between Pre & Post Acquisition stage, 2006-2007 being the Pre-Acquisition stage and 2007-2008 and 2008-2009 are the Post-Acquisition stage.

FINANCIAL HIGHLIGHTS Table 4

1 2008PROFITABILITY Net sales and 65,625 62,648 2009

2 20072008

3 20062007

Increase/decrease

1&2

2&3

operating(Rev.) Cost of sales

60,013 53,378

19,316 14,886

5,612 9.351 9,270 17.370 -

40,697 210.70 38,492 258.60

Operating profit Depreciation impairment Other Income Interest and finance charge Profit before tax and and

2,977

6,635

4,431

3,658 -55.100

2,204

49.74

3,038 688 1,232

2,488 656 1,849

865 409 313

550 32 -617 -

22.110 4.878 -33.370 -

1,623 247 1,536

187.60 60.39 490.70

Exceptional item Exceptional Items

-605 0

2,954 0

3,662 0

3,559 120.000 0 0.000 -

-708 0

-19.30 0.00

Profit before tax Tax for current year

-605 -805

2,954 1,189

3,662 958

3,559 120.000 1,994 167.700

-708 231

-19.30 24.11

46

Tax adjustment for earlier Profit Interest before Minority

-149

-548

399 -

-72.810

-548

0.00

349

2,313

2,703

1,964 -84.910 -

-390

-14.43

Minority Interest Share in P&L of

-174

219

16

-391

178.500 -

203

1,269.00 -

Association

35

-100

135 -

135.000 -

-101

10,100.00

Net Profit

485

2,193

2,686

1,708 77.90

-493

-18.40

FINANCIAL POSITION Gross Fixed Assets (Inc. CWIP) Depreciation Impairment and 14,404 7,405 5,035 6,999 94.52 Net Fixed Assets 34,765 37,164 11,153 2,399 -6.46 Investment 10,431 14,008 7,854 3,577 -25.54 Net Current Assets 3,011 4,254 4,257 1,243 -29.22 Capital Employed 48,207 55,426 23,285 7,219 -13.00 Loan Funds Minority Interest 28,310 1,287 32,352 1,615 8,443 857 4,042 -12.49 -328 Deferred Tax Liability(Net) 2,757 4,172 1,172 1,415 -33.92 Net Worth 15,853 17,286 12,814 1,433 -8.29 4,472 34.90 3,000 256.00 -20.31 23,909 283.20 758 88.45 -3 32,141 138.00 -0.07 6,134 77.90 26,011 233.20 2,370 47.07 49,169 44,569 16,188 4,600 10.32 28,381 175.3

47

Net by:

worth

represented

Share Capital Share Warrants/Suspense

170 0

123 140

104 0

47 -140 -

38.21 -100

19 140

18.27 0

Reserve and Surplus #

15,683

17,023

12,709

1,340 -7.87 -

4,314

33.9

Total Dividend Preference share (Including tax) Equity tax) Share (Including

15,853

17,286

12,814

1,433 -8.29

4,472

34.9

0.03

0.03

271

268

204

1.119

64

31.37

# Including Employee stock option Outstanding but net of Miscellaneous Expenditure, Figures for 2007-2008 and 2008-2009 include the figure of Novelis Inc. a foreign subsidiary, acquired by the company with effect from 07-05-2003.

48

Table 5

Balance Sheet 2006 to 2010 Table No. 12 in Rs. Cr. Mar '06 12 mths Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities Mar '07 12 mths Mar '08 12 mths Mar '09 12 mths Mar '10 12 mths

98.57 98.57 0 0 9,507.69 0 9,606.26 2,848.05 2,055.39 4,903.44 14,509.70 Mar '06 12 mths

104.33 104.33 0 0 12,313.71 0 12,418.04 6,410.20 958.4 7,368.60 19,786.64 Mar '07 12 mths

122.65 122.65 139.5 0 17,173.67 0 17,435.82 6,205.42 2,123.16 8,328.58 25,764.40 Mar '08 12 mths

170.46 170.05 3.17 0.41 23,584.69 0 23,758.32 5,713.23 2,611.06 8,324.29 32,082.61 Mar '09 12 mths

191.37 191.37 3.99 0 27,715.61 0 27,910.97 5,153.90 1,203.00 6,356.90 34,267.87 Mar '10 12 mths

Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets

10,418.25 11,252.66 12,608.46 13,393.07 13,793.35 3,635.45 4,245.95 4,799.12 5,506.10 6,058.53 6,782.80 7,006.71 7,809.34 7,886.97 7,734.82 832.92 1,476.43 1,119.87 1,389.63 3,702.79 3,971.31 8,675.32 14,107.99 19,148.84 21,480.83 4,095.09 4,315.31 5,097.91 4,070.14 5,921.41 1,248.40 1,504.50 1,565.02 1,201.22 1,311.87 248.15 187.45 131.05 213.48 139.96 5,591.64 6,007.26 6,793.98 5,484.84 7,373.24 1,054.29 1,360.86 1,116.35 1,709.16 1,588.62 669.14 478.05 15.93 630.24 0.25 7,315.07 7,846.17 7,926.26 7,824.24 8,962.11 0 0 0 0 0 3,445.24 3,937.01 4,293.04 3,363.91 6,891.19 953.17 1,284.14 906.01 803.16 721.49 4,398.41 5,221.15 5,199.05 4,167.07 7,612.68 2,916.66 2,625.02 2,727.21 3,657.17 1,349.43 6 3.17 0 0 0 14,509.69 19,786.65 25,764.41 32,082.61 34,267.87 49

Contingent Liabilities Book Value (Rs)

2,479.24 82.86

1,362.42 17,660.42 107.11 140.95

9,775.80 18,607.32 139.71 145.85

Profit & Loss account 2006 to 2010 Table No. 13 ------------------- in Rs. Cr. ------------------Mar '06 Mar '07 Mar '08 Mar '09 12 mths Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses 12 mths 12 mths 12 mths Mar '10 12 mths

12,435.03 19,921.40 20,943.69 19,641.40 20,516.43 1,079.89 1,608.47 1,825.68 1,481.59 1,059.45 11,355.14 18,312.93 19,118.01 18,159.81 19,456.98 283.81 283.52 571.18 712.66 574.62 1,033.84 443.89 141.8 -537.81 765.87 12,672.79 19,040.34 19,830.99 18,334.66 20,797.47 6,913.41 11,438.31 12,486.62 10,855.14 13,666.78 1,795.59 1,848.62 1,910.83 2,231.56 1,938.00 466.26 529.58 631.07 675.05 904.9 176.62 232.17 115.9 143.46 200.32 397.88 381.11 444.65 447.53 535.63 108.12 231.02 401.33 357.12 386.5 0 0 0 0 0 9,857.88 14,660.81 15,990.40 14,709.86 17,632.13 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10 12 mths 12 mths 4,096.01 4,379.53 242.39 4,137.14 552.8 4 3,580.34 9.54 3,589.88 940.3 2,564.33 3,222.51 0 177.34 12 mths 3,269.41 3,840.59 280.63 3,559.96 587.81 3.62 2,968.53 597.74 3,566.27 705.34 2,860.94 3,503.78 0.02 226.89 12 mths 2,912.14 3,624.80 336.93 3,287.87 644.34 0 2,643.53 198.55 2,842.08 610.88 2,230.27 3,854.72 0.02 229.58 50 12 mths 2,590.72 3,165.34 278 2,887.34 671.36 0 2,215.98 157.6 2,373.58 462.1 1,915.63 3,965.35 0 258.32

Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend

2,531.10 2,814.91 225.17 2,589.74 516.68 6.29 2,066.77 43.37 2,110.14 450.15 1,655.55 2,944.47 0 216.84

Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) Key Financial Ratios of Hindalco Industries Table No. 14

30.41

24.87

38.56

39.03

42.9

11,593.30 11,593.30 12,271.30 17,002.71 19,134.62 14.28 22.12 23.31 13.12 10.01 220 170 185 135 135 82.86 107.11 140.95 139.71 145.85

Mar '06 Investment Valuation Ratios Face Value Dividend Per Share Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) Free Reserves Per Share (Rs) Bonus in Equity Capital Profitability Ratios Operating Profit Margin(%) Profit Before Interest And Tax Margin(%) Gross Profit Margin(%) Cash Profit Margin(%) Adjusted Cash Margin(%) Net Profit Margin(%) Adjusted Net Profit Margin(%) Return On Capital Employed(%) Return On Net Worth(%) Adjusted Return on Net Worth(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations Return on Long Term Funds(%) Liquidity And Solvency Ratios Current Ratio Quick Ratio Debt Equity Ratio Long Term Debt Equity Ratio Debt Coverage Ratios Interest Cover Total Debt to Owners Fund Financial Charges Coverage Ratio Financial Charges Coverage Ratio Post Tax Management Efficiency Ratios Inventory Turnover Ratio Debtors Turnover Ratio Investments Turnover Ratio

Mar '07

Mar '08

Mar '09

Mar '10

1 2.2 21.79 97.95 77.84 49.89 22.25 17.35 22.08 18.75 17.94 14.29 13.43 15.37 17.23 16.2 8.76 8.76 17.77 1.12 0.73 0.51 0.31 11.37 0.51 12.23 10.68 2.83 11.16 3.22

1 1.7 34.6 157.96 103.16 47.13 21.9 18.55 22.27 16.72 16.9 13.76 13.91 19.07 20.65 20.88 107.09 107.09 20.03 1.22 0.66 0.59 0.52 20.9 0.59 17.87 13.88 4.32 13.3 4.89

1 1.85 26.64 155.79 138.43 40.09 17.1 13.64 14.02 14.31 14.31 14.56 14.56 12.44 16.54 12.83 140.95 140.95 13.56 1.08 0.53 0.48 0.37 13.63 0.48 13.53 13.3 4.32 12.46 4.32

1 1.35 17.12 106.81 86.31 28.92 16.03 12.07 12.48 13.76 13.76 11.87 11.87 9 9.38 8.16 139.71 139.71 9.72 1.2 0.88 0.35 0.25 10.43 0.35 10.48 9.53 5.16 13.13 5.16 51

1 1.35 13.54 101.68 98.72 25.69 13.31 9.71 9.86 10.89 10.89 9.69 9.69 6.48 6.86 5.3 145.85 145.85 6.71 1.02 0.39 0.23 0.19 8.6 0.23 10.41 10.31 3.63 15.48 3.63

Fixed Assets Turnover Ratio Total Assets Turnover Ratio Asset Turnover Ratio Average Raw Material Holding Average Finished Goods Held Number of Days In Working Capital Profit & Loss Account Ratios Material Cost Composition Imported Composition of Raw Materials Consumed Selling Distribution Cost Composition Expenses as Composition of Total Sales Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit Dividend Payout Ratio Cash Profit Earning Retention Ratio Cash Earning Retention Ratio AdjustedCash Flow Times

1.57 0.79 1.1 86.77 5.3 92.47 60.88 84.66 2.19 32.14 14.93 11.34 84.11 88.11 2.36

2.3 0.93 1.64 42.95 4.2 51.6 62.46 89.5 1.6 38.1 7.88 6.47 92.2 93.58 2.34

1.53 0.74 1.53 58.22 5.6 51.35 65.31 90.35 1.62 33.65 9.27 7.68 88.05 90.56 2.96

1.37 0.57 1.37 49.4 3.66 72.5 59.77 86.35 1.75 28.38 12.04 9.34 86.16 89.61 3.22

1.42 0.57 1.42 66.64 4.72 24.97 70.24 89.76 1.86 27.12 15.72 11.64 79.67 86.01 2.95

Mar '06 Earnings Per Share Book Value 14.28 82.86

Mar '07 22.12 107.11

Mar '08 23.31 140.95

Mar '09 13.12 139.71

Mar '10 10.01 145.85

FINANCIAL REVIEW Novelis delivered a creditable performance in the midst of very challenging circumstances. Severe demand destruction in two of its major markets, US and Europe led to a fall in shipments. Noveliss sales declined to decrease in the average LME price as well as a reduction in demand for flat rolled products in most regions during the last six months of fiscal 2009. However the conversion premium has improved even in these difficult times. Hindalco has taken several initiatives, which will lead to cost savings in FY10. These include realignment of product line to the revised demand scenario, closure of some of the capacities and prudent inventoery management. Hindalcos efforts to reduce overheads are bearing fruit and we shall continue to reduce overheads going forward.

52

Following is the review of the financial statements giving the effect of the acquisition: Net Sales and Operating Revenues:

Consolidated revenues in 2008-09 increased from Rs.60,013 crores to RS.65,625 crores. An increase of around 10%, primarily on account of weaker rupee vis a vis USD. This include Noveliss full year sale as compared to 10.5 months sales last year. In 2007-08 it increased from Rs.19316 crores to Rs60,013 crores, an increase of approximately 211%. This includes Noveliss sale for 10.5 months from 16th may, 07 to 31st March 08. Other Income:

In 2008-09, other income was at Rs.688 crores, an increase of around 5% from previous year, largely due to higher pre-tax yield and dividend from ABML. In 2007-08, it was 656 crores, an increase of around 60% largely due to the same reason. Interest:

In 2008-09 interest charges declined sharply from Rs.1849 crores to Rs.1232 crores due to sharp decline in debt after the take out of the bridge loan from Novelis. In 2007-08, it jumped sharply from Rs.314 crores to Rs.1849 crores almost entirely due to the servicing cost of the debt-funded Novelis acquisition. Net profit:

The Net profit in 2008-09 was 485 crores, a decrease by around 18%. This is mainly because of the acquisition Novelis which has a debt-equity ratio of 7.23:1 at the time of acquisition. Net Worth:

After acquisition in 2007-08, the net worth increased around by 34%. But in 2008-09 it decreased by around 8% this is due to large debts on Novelis. The liquidity position of Novelis has remained stable despite challenging market conditions. The integration activities are proceeding smoothly.

53

RATIO ANALYSIS: A tool used by individuals to conduct a quantitative analysis of information in companys financial statements. Ratios are calculated from current year numbers and then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominantly used by proponents of fundamental analysis. Among the dozens of financial ratios available, following important are taken into consideration for analysis: Liquidity measurement ratios: Current ratio Quick ratio Profitability indicator ratios: Return on assets Return on equity Return on capital employed Debt ratios: Debt ratio Debt-equity ratio Interest coverage ratio Operating performance ratios: Asset turnover Inventory turnover Operating margin Cash flow indicator ratios: Operating cash flow/sales ratio

54

Dividend payout ratio Investment valuation ratios: Book value per share ratio Earnings per share

LIQUIDITY RATIOS Liquidity ratios attempt to measure a companys ability to pay off its short-term debt obligations. This is done by comparing a companys most liquid assets(or, those that can be easily converted to cash), its short-term liabilities. In general, the greater the coverage of liquid assets to short-term liabilities the better as it is clear signal that a company can pay its debts that are coming due in the near future and still fund its ongoing operations. On the other hand, a company with a low coverage rate should raise a red flag for investors as it may be a sign that the company will have difficulty meeting running its operations, as well as meeting its obligations.

Current ratio: The current ratio is a popular financial ratio used to test a companys liquidity(also referred to as its current or working capital position)by deriving the proportion of current assets available to cover the current liabilities. Current ratio=current assets/current liabilities Also known as liquidity ratio, cash asset ratio and cash ratio. The ratio is mainly used to give an idea of the companies liability 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.

55

Table 6 Unit Times 2008-09 1.74 2007-08 1.76 2006-07 2.46

Fig 6

CURRENT RATIO
2.5 2 1.5 CURRENT RATIO 1 0.5 0 2008-09 2007-08 2006-07

This chart shows that the capability of the company to pay back its short-term liabilities has decreased after acquisition. Although thee company managed to sustain its current ratio in 2008-09. Quick ratio The quick ratio or the quick assets ratio or the acid-test ratio- is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position. Quick ratio=cash equivalents + short-term investments + accounts receivable/current liabilities.

56

The basics and use of this ratio are similar to the current ratio in that it gives users an idea of the ability of a company to meet its short-term liabilities with its short-term assets. Another beneficial use is to compare the quick ratio with the current ratio. If the current ratio is significantly higher, it is a clear indication that the companys current assets are dependent in inventory. Table 7 Unit Times 2008-09 0.89 2007-08 0.76 2006-07 0.84

QUICK RATIO
0.9 0.85 0.8 0.75 0.7 0.65 2008-09 2007-08 2006-07

QUICK RATIO

This quick ratio shows that although the companys liquidity position was affected by the acquisition but the company still has sufficient cash reserve to manage its operation and pay back its obligations. PROFITABILITY INDICATOR RATIOS These ratios, much like the operations performance ratios, give users a good understanding of how well the company utilized its resources in generating profit and shareholder value. The long term profitability of a company is vital for both the survivability of the company as well as the benefit received by shareholders. It is these ratios that can give insight into the all important profit. In this section, we will look at 3 important profit margins, which display the amount of profit a company generates on its sales at the different stages of an income statement. The three
57

ratios covered in this section- Return on Assets, Return on Equity and Return on capital employeddetail how effective a company is at generating income from its resources. Return on assets: This ratio indicates how profitable a company is relative to its total assets. The return on assets (ROA) ratio illustrates how well management is employing the comapnys total assets to make a profit. The higher the return, the more efficient management is in utilizing its asset base. The ROA ratio is calculated by comparing net income to average total assets, and is expressed as a percentage.

Table 8 Return on assets= net income/average total assets Units % 2008-09 2.69 2007-08 2.19 2006-07 1.51

Fig 8

ROA
3 2.5 2 1.5 1 0.5 0 2008-09 2007-08 2006-07 ROA

58

The acquisition has increased the assets of the combined entity but due to high debt on Novelis, the income has reduced. Still in these critical situations the company has managed its assets well and improved their return.

Return on equity: The amount of net income returned as a percentage of shareholders equity. The ratio indicates how profitable a company is by comparing its net income to its average shareholders equity. The return on equity ratio (ROE) measures how much the shareholders earned for their investment in the company. The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors.

Return on equity= net income/average shareholders equity Widely used by investors, the ROE ratio is an important measure of a companys earnings performance. The ROE tells common shareholders how effectively their money is being employed.

Table 9 Units % 2008-09 3.06 2007-08 12.69 2006-07 20.96

59

Fig 9

ROE
25 20 15 10 5 0 2008-09 2007-08 2006-07 ROE

The analysts believed that Hindalco is paying too high amount for a loss making company. This can be seen from the chart above which shows that the acquisition was not so profitable for the investors as their return on equity has decreased over the years.

Return on capital employed: This ratio indicates that the efficiency and profitability of a companys capital investments. The return on capital employed (ROCE) ratio, expressed as a percentage, complements the return on equity (ROE)ratio by adding a companys debt liabilities, or funded debt, to equity to reflect a companys ability to generate returns from its available capital base. Financial analysts consider the ROCE measurement to be a more comprehensive profitability indicator because it gauges managements ability to generate earnings from a companys total pool of capital.

Return on capital employed(ROCE)= net income/capital employed Capital employed=average debt liabilities + average shareholders equity

60

Table 10 Unit % 2008-09 1.30 2007-08 8.67 2006-07 17.07

Fig 10

ROCE
18 16 14 12 10 8 6 4 2 0 2008-09 2007-08 2006-07

ROCE

Clearly a high over Novelis is visible on the chart which shows that the return on capital employed has decreased considerably indicating that the return after the acquisition was very less as compared to the pre acquisition period. Debt ratios: These ratios give users a general idea of the companys overall debt load as well as its mix of equity and debt. Debt ratios can be used to determine the overall levcl of financial risk of a company and its shareholders face. In general, the higher the amount of debt held by a company the greater the financial risk of bankruptancy. The debt ratio-

61

The debt ratio compares a companys total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. A low percentage means that the company is less dependent on leverage i,e; money borrowed from and/or owed to others. The lower the percentage, the less leverage a company is using and the stronger its equity position. In general, the higher the ratio, the more risk that company is considered to have taken on. Debt ratio=total liabilities/total assets Table 11 Unit % 2008-09 0.33 2007-08 0.31 2006-07 0.16

Fig 11

DEBT RATIO
0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2008-09 2007-08 2006-07 DEBT RATIO

The above chart shows that the company is able to manage its debt efficiently even after acquiring a company which is already had a huge debt over it. This is all because of the excellent financial conditions of Hindalco in the past. Debt-equity ratio: The debt equity ratio is another leverage ratio that compares a companys total liabilities to its total shareholders equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed.
62

To a large degree, the debt-equity ratio provides another vantage point on a companys leverage position, in this case, comparing total liabilities to shareholders equity, as opposed to total assets in the debt ratio. Similar to the debt ratio, a lower the percentage means that a company is using less leverage and has a stronger equity position. Debt-equity ratio=total liabilities/shareholders equity Table 12 Unit % 2008-09 1.79 2007-08 1.87 2006-07 0.66

Fig 12

DEBT EQUITY RATIO

2 1.5 1 0.5 0 2008-09 2007-08 2006-07 DEBT EQUITY RATIO

This chart shows that over the time Hindalco is shifting more towards Equity and less on debt. This also due to already huge amount of debt over Novelis, Hindalco is not able to raise more funds through financial institution and focusing more towards shareholders.

Interest coverage ratio: The interest coverage ratio is used to determine how easily a company can pay interest expenses on outstanding debt. The ratio is calculated by dividing a companys earnings before interest and
63

taxes(EBIT) by the companys interest expenses for the same period. The lower the ratio, the more the company is burdened by debt expense. When a companys interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable . Interest coverage ratio= earnings before interest and tax/interest expenses In a more positive sense, prudent borrowing makes a sense for most companies, but the operative word here is prudent. Interest expenses affect a companys profitability, so the cost benefit analysis dictates that borrowing money to fund a companys assets has to have a positive effect. An ample interest coverage ratio would be an indicator of these circumstances, as well as indicating substantial additional debt capacity.

Table 13 Unit Times 2008-09 2.97 2007-08 3.94 2006-07 15.44

Fig 13

INTERST COVERAGE RATIO

16 14 12 10 8 6 4 2 0 2008-09 2007-08 2006-07 INTERST COVERAGE RATIO

64

This is clear that the company is over-burdened by the interest payment of the debt including that of debt of Novelis. This is the situation of concern but as the company is performing but as the company is performing, by 2011 the burden will be reduced to a great extent which is a good sign.

OPERATING PERFORMANCE RATIOS These ratios at how well a company turns, its assets into revenue as well as how efficiently a company converts its sales into cash. Basically, these ratios look at how efficiently and effectively a company is using its resources to generate sales and increase shareholder value. In general, the better these ratios are, the better it is for shareholders. Asset turnover: The amount of sales generated for every Re.worth of assets. Also known as the Asset Turnover Ratio. Current assets turnoverCurrent assets turnover ratio shows the productivity of the companys current assets.

Fixed-Asset turnover ratioThis ratio is a rough measure of the productivity of companys assets(property, plant & equipment or PP&E)with respect to generating sales. This annual turnover ratio is designed to reflect a companys efficiency in managing these significant assets. Simply put, the higher the yearly turnover rate, the better.

65

Asset turnover=revenue/assets Table 14

Assets Current assets Fixed assets

Units Times Times

2008-09 3.76 2.06

2007-08 3.05 1.72

2006-07 2.56 2.09

Fig 14

4 3.5 3 2.5 2 1.5 1 0.5 0 2008-09 2007-08 2006-07 CURRENT ASSETS FIXED ASSETS

This chart show that even after acquiring a company with huge debt Hindalco is able to make best use of its assets generating better revenues over the years. Inventory turnover ratio: A ratio showing how many times a companys inventory is sold and replaced over a period. Generally calculated as: =sales/inventory

66

However, it may also be calculated as: =cost of goods sold/average inventory The days in the period can be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or inventory turnover days. A high ratio implies either strong sales or ineffective buying. 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. Table 15 Unit Times 2008-09 7.69 2007-08 5.40 2006-07 4.01

INVENTORY TURNOVER RATIO

8 7 6 5 4 3 2 1 0 2008-09 2007-08 2006-07 INVENTORY TURNOVER RATIO

This chart clearly shows that Hindalco is generating more and more sales over the years. It is able to convert its inventory into sales efficiently which is a good sign. Operating Margin: A ratio used to measure a companys pricing strategy and operating efficiency. Operating margin= operating income/net sales

67

Operating margin is a measurement of what proportion of a companys revenue is left over after paying for variable cost 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. Also known as operating profit margin or net profit margin. Table 16 Unit % 2008-09 4.54 2007-08 11.06 2006-07 22.94

Fig 16

OPERATING MARGIN
25 20 15 OPERATING MARGIN 10 5 0 2008-09 2007-08 2006-07

The decreasing operating margin shows that revenue left over after paying for variable cost is constantly being used by the company to pay off its outstanding debt. Therefore year after year the amount is reducing.

68

CASH FLOW INDICATOR RATIOS These ratio look at cash flow indicators, which focus on the cash being generated in terms of how much is being generated and the safety net it provides to the company. These ratios can give users another look at the financial health and performance of a company. Operating cash flow/sales ratio: This ratio compares a companys operating cash flow to its net sales or revenues, which gives, investors an idea of the companys ability to turn sales into cash. It would be worrisome to see a companys sales grow without a parallel growth in operating cash flow. Positive and negative changes in a companys terms of sale and/or the collection experience of its accounts receivable will show up in this indicator. Table 17 Unit % OCF/Sales ratio=operating cash flow/net sales (revenue) 2008-09 0.07 2007-08 0.09 2006-07 0.17

Fig 17

SALES RATIO
0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 2008-09 2007-08 2006-07

SALES RATIO

69

Although the sales has increased after the acquisition of Novelis as number of customers has increased. But the company is unable to convert the sales into cash easily. But still the difference from the previous years is very less which the company will improve. Dividend payout ratio: This ratio identifies the percentage of earnings (net income) per common share allocated to paying cash dividends to shareholders. The dividend payout ratio is an indicator of how well earnings support the dividend payment. The payment of a cash dividend is recorded in the statement of cash flows under the financing activities section. Table 18 Dividend payout ratio (%) = dividend per common share/earnings per share

Unit %

2008-09 0.49

2007-08 0.10

2006-07 0.06

Fig 18

DIVIDEND PAY-OUT RATIO

0.5 0.4 0.3 DIVIDEND PAY-OUT RATIO 0.2 0.1 0 2008-09 2007-08 2006-07

70

The companys earning is supporting dividend payment well. This is one of the reason of why its investors support the company even after the controversial acquisition of Novelis. INVESTMENT VALUATION RATIOS This last section of the ratio analysis looks at a wide array of ratios that can be used by investors to estimate the attractiveness of a potential or existing investment and get an idea of its valuation. However, when looking at the financial statements of a company many users can suffer from information overload as there are so many different financial values. This includes revenue, gross margin, operating cash flow, EBITDA, pro forma earnings and the list goes on. Investment valuation ratios attempt to simplify this evaluation process by comparing relevant data that help users gain an estimate of valuation.

Book value per share: Book value per share is a measure often used by investors to determine the of safety associated with a stock investment. =Stockholders equity Preferred stock/average outstanding shares Somewhat similar to earning per share, but it relates the stock holders equity to the number of shares outstanding, giving the shares a raw value.

Table 19 Unit Rs. 2008-09 93.24 2007-08 140.86 2006-07 122.79

71

Fig 19

BOOK VALUE
160 140 120 100 80 60 40 20 0 2008-09 2007-08 2006-07 BOOK VALUE

This chart shows that the safety associated with the investment in Hindalco is low as compared to previous years but looking at the companys past performance it will surely make up the losses very soon. Earnings per share: The portion of a companys profit allocated share of common stock. Earnings per share serve as an indicator of a companys profitability. =net income-dividends on preferred stock/average outstanding shares The basic EPS figure is the total earning per share based on the number of shares outstanding at the time.

The diluted EPS figure reveals the earnings per share a business would have generated if all stock options, warrants, convertible, and other potential sources of dilution that were currently exercisable were invoked and the additional shares printed resulting in an increase in the total shares outstanding. Diluted EPS figure expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.
72

Cash EPS is a measure of financial performance that look at the cash flow generated by a company on a per share basis. A companys cash EPS can be used to draw comparisons to other companies or to the companys own past results. Table 20 EPS Basic EPS Diluted EPS Cash EPS Cash EPS=operating cash flow/diluted shares outstanding Unit Rs. Rs. Rs. 2008-09 3.22 3.22 23.41 2007-08 17.04 16.95 36.38 2006-07 26.73 26.73 35.33

Fig20

40 35 30 25 20 15 10 5 0 2008-09 2007-08 2006-07 BASIC EPS DILUTED EPS CASH EPS

The total earnings per share based on the number of shares outstanding at the time have decreased over the years. Diluted EPS has also reduced from the last year and same is the result is with the cash EPS. This is also a point of concern of the company which has to be resolved.

73

CONCLUSION To summarize the achievements in the financial year, HINDALCO recorded a commendable performance in an extremely difficult year that witnessed an unprecedented upheavals in the financial and commodity markets. This performance is testimony to the sound business models of our Aluminium and Copper businesses, the underlying strength of business operations and project management capabilities, stable and capable processes, and successful implementation of a well thought out strategic plan for quantum growth supported by a balance sheet and robust cash flows from existing operation. Global economy is expected to revive slowly and overall growth could remain subdued. The upstream aluminium industry will continue to face pricing pressure on account of large inventories and low demand growth, while copper business will continue to face challenges on accounts of poor concentrate availability and low TcRcs. Key macro-economic value driven will continue to remain depressed over the short term. Financial year 10 will be a challenging year. HINDALCO has successfully put in a permanent capital structure by talking out the bridge loan US$ 3.30 billion raised for NOVELIS Inc. in extremely challenging condition. HINDALCO has reduced its leverage in the process through deploying the proceeds of right issue and using their treasury. The challenge is now to grow in the market where credit is scarce and HINDALCO is successfully progressing on intended path.

74

FUTURE OUTLOOK High prices and buoyant demand outlook in the domestic as well as international markets prompted aluminium companies to undertake huge expansion plans. Huge quantity of aluminium will come into the market in the coming years. All the three major companies Nalco, Hindalco and Vedanta group have drawn up plans to increase Capacities. At the end of January 2007, investment in hand in the aluminium anti aluminium products sector amounted to Rs.59,81800 million and are spread across 35 projects. Most of the major projects, amounting to over 60 per cent of the aggregate investment in value terms, are under implementation. If all the projects are successfully implemented, aluminium smelting capacity will increase from 11.8 lakh tonnes to 18 lakh tonnes. Of this, about 1.6 lakh tonnes will come on stream in 200708 and five lakh tonnes each in 2009 and 2010. Hindalco has undertaken aggressive plans to increase its capacities through capacity expansion as well as by setting up greenfield plants. Hindalco increased its capacity at Hirakud plant by 35,000 tonnes to one lakh tonne. When Hindalco completes all its project, smelting capacity will increase by about 10 lakh tonnes. Along with smelting capacities, the companies are expanding alumina capacities and setting up captive power plants. Domestic alumina capacity is set to increase by 9.5 million tonnes when all the outstanding projects are completed. In 20070 itself about 1.23 million tonnes of capacity will come on stream, catapulting aggregate capacity to 4.23 million tonnes. Large alumina capacities will not only feed captive aluminium smelters, but also leave surplus alumina to be exported to lucrative markets like China. Currently Hindalco's production is tied up with clients. Also Novelis has similar contracts with its suppliers. But after 3-4 years it would start the operation of new plants. Then it can source excess capacity to the Novelis plants located in south east asian countries. The merger looks not bad if the current financial valuations are ignored. Also we need to keep in mind that Hindalco is a very aggressively growing company, for it to build infrastructure that can match Novelis is very difficult.

75

BIBLOGRAPHY Reference Books R.P Rustogi Financial Management Hindalco Annual Report 2010 Hindalco Annual Report 2009 Hindalco Annual Report 2008 Hindalco Annual Report 2007 Hindalco Annual Report 2006 Websites www.hidalco.com www.novelis.com www.adityabirla.com www.wikipediya.org

76

77