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MARCH 11, 2007
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The centre is looking at removing the distinction between FDI and FII investments. This will impact sectors like asset reconstruction, real estate and aviation, where separate ceilings apply to FDI and FII investment. However, allowing FDI through the FII route in the realty sector could result in prices shooting through the roof. The Asian financial crisis of the '90s is still fresh in mind, and a method should be devised to moderate possible volatility in key sectors.

S&P And After
For the first time in 14 years, international credit rating agency, Standard and Poor's (S&P), has raised India's credit rating to investment grade. S&P is the last of the three major international rating agencies to do so. Moody's Investors Service did it in January 2004 and Fitch Ratings in August 2006. The upgrade is likely to spur the flow of foreign investment into power, steel and other industries, which receive less than a tenth of the funds going China's way.
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Business Today,  February 25, 2007

Birla's Global Gambit
Hindalco gets an international footprint with Novelis, but Chairman Kumar Mangalam Birla's greater challenge begins now.
By acquiring Novelis, Bhattacharya has given the group's globalisation strategy a huge shot in the arm
Debu Bhattacharya
Managing Director/Hindalco
Till yesterday, Hindalco was a company with one aluminium smelter, a couple of alumina refineries and rolling mills, an extrusion plant, a foil plant and a string of memoranda of understanding to put up new smelting and refining capacities. All these proposed and existing capacities are, of course, domestic. One fine day, after a year of negotiations and plenty of prodding from investment bankers, Kumar Mangalam Birla, Chairman, Aditya Birla Group (of which Hindalco is a part), wakes up to discover he's now got plants located in 34 locations that are spread over four continents and 11 countries. Birla has reason to be contended with the development-and with his core team that spearheaded this transaction, which includes Debu Bhattacharya, Managing Director, Hindalco, and Sumant Sinha, Group CFO. By taking over Novelis, a world leader in aluminium rolled products-the deal is expected to be completed by the first quarter of 2007-08 and the acquisition needs the approval of at least two thirds of Novelis' shareholders-Hindalco has taken a giant stride on the global stage.

This clearly is the Aditya Birla Group's largest acquisition on international shores-and the second-largest by an Indian company after Tata Steel's buyout of Corus-but it isn't as if going global is a new phenomenon at this group, whose roots date back to the 19th century. Way back in 1969, when the late Aditya Birla was just 24, he set the group's global agenda at a time when few promoters were even thinking about it. In the years ahead, he set up some 19 companies outside India in countries like Thailand, Malaysia, Indonesia, the Philippines and Egypt. By acquiring Novelis, Birla has given the group's globalisation strategy a huge shot in the arm.

He set up some 19 companies outside India in countries like Thailand, Malaysia, Indonesia and Egypt
Aditya Birla
Died in October 1995
The deal should have also come as a shot in the arm for the share price of Hindalco, which has been languishing for some time now. In absolute terms, it's fallen 9 per cent over a year, and relative to the Sensex it's down 35 per cent. If the transaction was expected to provide some respite in the short term to the stock, exactly the opposite took place: A day after the deal was announced, the Hindalco share plunged 13.74 per cent, and at the time of writing the stock was down 12.55 per cent from its price before the announcement. A $6 billion (Rs 26,400 crore) price tag (debt included) for Novelis combined with a complex funding mechanism spooked the markets, with a section of analysts dismissing the deal as a value-destroyer.

It isn't as if the deal doesn't have some compelling reasons. The acquisition is complementary to Hindalco given its own strengths in the upstream business where it is a very large player. The deal gives it access to the global market and, in one stroke, will add close to 3 million tonnes of downstream aluminium facility. Besides, there is the advantage of Hindalco being a low-cost aluminium producer. Novelis will be in a position to source this which will reduce its own production costs and make it more cost-competitive. "Hindalco is a global leader in aluminium and the proposed transaction provides compelling benefits for both Novelis and Hindalco. It is in line with our strategy to expand our involvement in downstream aluminium markets," says Birla. The transaction, hence, provides a combination of access to geographies and a large customer base. "The acquisition for Hindalco offers an opportunity to scale up globally," says Rajeev Gupta, Managing Director and Head of Carlyle's India buyout team.


Novelis brings value, but creating shareholder value won't be easy.


Access to global markets which will make Hindalco an international player

Addition of 3 million tonnes of down stream aluminium facility

Hindalco can supply aluminium to Novelis at low costs resulting in significant cost reduction overall

Novelis' clientele includes big names like Coca-Cola, General Motors and Ford


Over $2 billion will be borrowed which will be a big debt burden

Margins could be under pressure when aluminium prices start increasing

Novelis, in spite of accounting for a fifth of the global rolled aluminium capacity, is said to have limited pricing power

Novelis made a loss of $170 million for the first nine months of 2006 and it could take a while to turn the company around

A comparison with Tata Steel's acquisition of Corus is almost inevitable. Both are multi-billion dollar deals involving large business houses from India. Besides, both the transactions are looking at grabbing the advantage of being low-cost producers which will facilitate shipping products from India. Agrees Jitesh Gadhia, Managing Director, ABN Amro, one of the lenders to Hindalco, who points out that there are synergies for the buyers in both cases. "There is some similarity in the industrial rationale between the Tata Steel-Corus and Hindalco-Novelis deals as far as vertical integration is concerned. Both buyers have visible upstream strengths and they will now be able to complement this with high-quality downstream operations in western markets," Gadhia told BT.

The Concerns

There's little doubt about the long-term benefits of the transaction and its ability to create value for Hindalco shareholders by shipping primary aluminium to Novelis that's produced at a much lower cost than that of global competitors. It's, however, the potential short-term damage the deal can wreak that's worrying analysts and investors. Consider: The enterprise value of $6 billion has $2.4 billion (Rs 10,560 crore) by way of debt, with Hindalco forking out the rest in an all-cash transaction. That may be too high a figure to be comfortable with. "The acquisition price for Novelis is at a 100 per cent premium to Novelis' 2006 average price and at a 57 per cent premium to the last three months' average price," says foreign brokerage firm CLSA in a report following the announcement of the deal. CLSA places an "underperform" on the Hindalco stock at a price point of Rs 149.40.


There's tonnes of debt.

Details In $ million
Cash from the treasury of Hindalco 450
Borrwings from Essel Mining & Industries (an Aditya Birla Group company) 308
Debt that will be raised by an SPV of Hindalco to be incorporated in Canada 2,800
Existing debt on Novelis' balance sheet that Hindalco will take over 2,400
Total enterprise value 5,958

Then there's the big mountain of debt which, fear analysts, could affect future cash flows. Ratings agency, Fitch has placed Hindalco's ratings on negative. CLSA, in its report, points out that for the year ended March 2006, Hindalco had over $800 million (Rs 3,520 crore) in cash and equivalents. "Hindalco has free cash flows of $770-870 million (3,388-3,828 crore) over the next two years but post capex cash flows are negative," it adds. Novelis' financials too are hard to ignore and the company, for the first nine months of 2006, had a loss of $170 million (Rs 765 crore) on revenues of $7.4 billion (Rs 33,300 crore).

"The valuation depends on the intrinsic capability of an asset," rationalises Sunirmal Talukdar, CFO, Hindalco. He points out that it would have taken Hindalco at least 10 years to create that kind of capacity on the downstream front. "The acquisition is a good strategic fit and the way we see it, there is a lot of upside potential in aluminium as a commodity," adds Talukdar. He speaks of areas like transportation, architecture, packaging and pharmaceuticals which will be big markets in the future for aluminium.

For Kumar Mangalam Birla, the last few years have been packed with action in the main businesses that include cement, telecom, textiles, IT and IT-enabled services, financial services and metals. In cement, the Aditya Birla Group is among the largest players with a total capacity well in excess of 30 million tonnes. The acquisition of L&T's cement division in 2003-which was subsequently renamed UltraTech Cement-has seen the group becoming very strong in that sector. Idea Cellular is set to be listed on the bourses. The company which operates in 11 circles should be operational in Mumbai and Bihar by the end of 2007 and is eventually looking to be a large pan-India player. With valuations in the sector on a high, Idea Cellular seems to be well-placed to ride the boom. Likewise, the IT/ITES story too is gaining ground. Starting off with relatively smaller acquisitions like PSI Data Systems and Transworks, the Aditya Birla Group has emerged stronger after buying out Canadian BPO, Minacs. Garments, where the group has brands like Van Heusen and Louis Philippe, is a competitive segment and has a host of players. Given that this business has a strong retail network, Birla will find this handy when it comes to launching his much-talked about retail foray. To be launched under a new company, Aditya Birla Retail, the retail business is said to be ready to get off the blocks over the next 6-9 months. Birla has already announced his intentions by buying over Trinethra's chain of over 170 outlets spread across southern India. That acquisition has given the group ready access to the business which promises to be among the most competitive in the years to come. Insurance has been a bit slow though Birla intends to be a big player in the financial services business. With low levels of penetration and a large population, there seems to be space for many more players. With Birla Global Finance and Indo-Gulf Fertilisers having merged into Aditya Birla Nuvo-earlier called Indian Rayon-Birla is clear that the conventional businesses will slowly become less important. With sectors like retail and telecom, Birla is sure to make huge investments in these businesses. That apart, he is sure to look at other business opportunities as well.

"The valuation depends on the intrinsic capability of an asset"
Many Irons in the Fire
Sunirmal Talukdar
But servicing the debt and the loss of other income, according to analysts, will be around $250 million (Rs 1,100 crore) per annum. Will Hindalco be able to wring out adequate earnings from Novelis to keep its head above water? "We know the interest outgo. In the manufacturing sector, EBITDA (earning before interest, tax, depreciation & amortisation) is key and our focus will be on that," says Talukdar. What also augurs well for the transaction is the expiry of price ceilings on Novelis' products. One look at Novelis' financial numbers for the nine month period of 2006 indicates that a loss of $170 million (Rs 748 crore) was incurred on account of the company having a ceiling on the price of its products. It is estimated that these contracts accounted for around 20 per cent of Novelis' sales. Importantly, from January 2007, around half of these contracts with the price ceiling have expired. The ceiling on the other half will expire by 2009-10 and Novelis, apparently, will not accept any new contracts with a price ceiling clause. That should augur well for the company's financials. Analysts expect Novelis to enter the black in 2007 and 2008 pretty convincingly.

The big picture that Birla sees is an entry into the Fortune 500 list for Hindalco three years ahead of plan-the original target was for 2010. "Acquisitions are not geography dependent. They depend on value-creation and will have to be in sync with existing businesses," says Birla, who's clearly following in his father's footsteps. Unlike the seventies and the eighties (during that time Aditya Birla built his empire), the current global environment has never ever been as conducive for Indian business. That would explain the larger scale of the younger Birla's ambitions when compared with those of his father. The intent, though, is similar: To be truly global, and not just geographically. With Novelis, though, Birla and his team will have to use all their skills to get the best possible value out of it. The world is closely watching this one


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