|Rs 1000 million NCD programmes||AAA (Reaffirmed)|
|Fixed deposit programme||FAAA (Reaffirmed)|
|Rs 2000 million short-term debt programme (Enhanced from Rs 1500 million)||P1+|
Indian Aluminium Company Ltds (Indal) ratings reflect the companys close association with its parent, Hindalco Industries Ltd (rated AAA and P1+ by Crisil), which holds more than 90 per cent stake in Indal and continues to be actively involved in its management. Indals association with Hindalco results in business synergies and enhances the formers financial flexibility. In July 2002, Hindalco, which then held a 74.6 per cent in Indal, announced a voluntary open offer to acquire the remaining 25.4 per cent shares. The open offer closed recently subsequent to which Hindalcos stake has increased to more than 90 per cent. Crisil expects greater synergies between the two companies in future in line with Hindalcos increased stake. Crisil has considered the consolidated financials of Indal and Hindalco (including Indo Gulf Corporations copper business, which will be merged with Hindalco with effect from April 1, 2002) in assigning Indals rating.
Indals ratings are supported by its strong market position in the semi-fabricated (semifabs) segment of the domestic aluminium industry, its comfortable financial position and improving operating efficiency. Besides being the second-largest player after Hindalco in the semifabs segment, Indal has a significant presence in the alumina market. Indals financial position continues to remain comfortable with key indicators such as gearing, interest cover and cash accruals in relation to debt being healthy. Indal is expected to maintain its comfortable financial position in future despite an expected increase in its gearing on account of the ongoing capacity expansion projects at its Hirakud smelter and despite the expected pressure on its profit margins. Moreover, the companys improving operating efficiency on account of its ongoing metal and power capacity expansion would offset the impact of profitability pressures to some extent.
Hindalcos parentage: Hindalco actively participates in Indals management. Apart from management support, Indals association with Hindalco results in business synergies besides enhancing the formers financial flexibility. One of the areas in which both Indal and Hindalco benefit is raw material sourcing. Indal, whose downstream capacity currently exceeds its own primary metal production capacity, meets part of this deficit through a tolling arrangement with Hindalco. Hindalco, on the other hand, is deficient in alumina, and so purchases alumina from Indal. With Indal and Hindalco expanding their metal production and alumina capacities respectively, the extent of tolling would come down or even end in future. Nevertheless, both companies are looking at tapping business synergies in other areas such as joint sales and distribution planning. In line with Hindalcos increased stake in Indal, Crisil expects greater synergies between the two companies in future.
Strong market position in semifabs: Indals strong market position in the semifabs segment is due to its diversified product mix with a significant presence in value-added niche products and also due to its brand strength and proximity to markets resulting from its geographically diversified manufacturing facilities. Apart from Hindalco, it is the only domestic player producing the entire range of semifab products. Indal and Hindalco together have a share of around 75 per cent in the semifab products market. Moreover, Indals realisations are either superior or comparable to those of its competitors due to the higher value-addition within each of its product segments.
Indals market position in the foils segment has further strengthened following its acquisition of Annapurna Foils Ltd (AFL) in FY2002. Thereafter, AFL has been merged with Indal with effect from April 1, 2002, subject to filing of certain legal compliance. AFL has a 3,000 tpa foil and 1,000 tpa strips capacity near Hyderabad. Apart from the additional capacity, the acquisition gives Indal geographical diversity since its own 6,000 tpa foil plant is located at Kalwa, Maharashtra, and there is scope for significant operational synergies between the two plants.
In addition to semifab products, Indal has a significant presence in alumina, in both the domestic and international markets. Besides, a significant proportion of its alumina sales are of special grade for applications in the cement and refractory industries. Special grade alumina fetches better realisations and is relatively less susceptible to aluminium price fluctuations than standard alumina. The companys alumina sales would, however, decline in future once its Hirakud smelter expansion goes on stream resulting in higher internal consumption.
Improving operating efficiency: Indal has fully integrated operations from mining bauxite to manufacturing downstream products. But its production costs are relatively higher than those of its domestic peers. This is largely due to its older plants and relatively higher specific power consumption per tonne of aluminium. Indals operating efficiency is also constrained by the fact that it is metal deficient and hence has to purchase metal from outside sources. The company is in the midst of increasing its smelter capacity at Hirakud to 65,000 tonne per annum (tpa) from the present 30,000 tpa, following which its metal linkages and cost of production would improve.
Cyclical industry constrains business risk profile: Indals business risk profile is constrained by its exposure to highly cyclical end-user segments. Further, the aluminium industry is exposed to volatility in prices on the benchmark London Metal Exchange (LME). Indals presence in value-added segments, where realisations are less susceptible to LME price fluctuations, however, mitigates this risk to a large extent.
Comfortable financial position: Indals financial position is characterised by comfortable gearing (0.54 as on March 31, 2002) and profit margins although its profitability has come under pressure of late. Its comfortable profit margins coupled with low gearing results in healthy debt protection ratios (interest cover and cash accruals in relation to debt). Going forward, however, the companys gearing is expected to increase due to its ongoing projects at Hirakud. Despite this, Indals capital structure would remain comfortable with its gearing not expected to exceed 0.75 times. Although Indals operations would benefit from the capacity expansion projects, its profit margins are expected to remain at current levels due to its relatively higher production costs, the expected pressure on its sales realisations. Its debt protection ratios, despite remaining favourable, are expected to decline.
Limited project risk: Given its managements track record, the risks arising on account of the on-going brownfield capacity expansion projects at Hirakud are limited. Indal is in the midst of doubling its smelter capacity at Hirakud to 65,000 tpa. This additional capacity is expected to be commissioned by the end of the current financial year. It is also increasing its special alumina capacity at Belgaum, Karnataka. Subsequently, Indal would also double its captive power plant capacity at Hirakud to meet the power requirements of its enhanced smelter capacity.
The aluminium industrys fortunes are closely linked to economic growth and the movement in LME prices, which are currently at around $1300-1350/tonne. Global demand and prices are currently constrained by the continued slowdown in the US and other major world economies. A recovery in the US economy is crucial for a revival in aluminium demand as well as in prices. Soft demand and high inventory build-up in the metal exchanges are expected to result in weak aluminium prices for most of the current financial year. In the long run, however, the outlook on LME prices is favourable from current levels.
While domestic prices will largely follow trends in LME prices, they will also be critically dependent on movements in customs duties and the rupee depreciation. Customs duty, which is currently 15 per cent, is not expected to reduce significantly, however. Domestic demand is expected to grow at around 2 per cent annually in the short to medium term. In the long term, demand is expected to become more buoyant on the back of the around 6 per cent expected gross domestic product (GDP) growth and on account of the expected growth in hitherto under-penetrated user segments such as construction, transportation and packaging.
Rating Sensitivity Factors
Indals future rating would be critically dependent on Hindalcos rating and its continued association with the latter. Its financial risk profile would depend on its ability to maintain its comfortable capital structure and profit margins. Completing its ongoing projects on time and without cost over-runs will be crucial for Indals future profitability and overall financial risk profile.