Hindalco Industries Limited is one of the county?s largest aluminum and copper producers. Being a part of the Aditya Birla Group, this company has made its mark in the world. It has been positioned as the sixth largest aluminum producer in Asia and the eleventh largest in the world, based on volumes of calendar year 2007. On May 15, 2007, Hindalco acquired Novelis Inc, which is the world?s largest aluminum rolled products producer. With this acquisition, Hindalco has achieved economies of sale, an increased global reach and also gotten access to advanced technology. The company also owns and operates one of the largest single location copper smelters in the world at Dahej. They receive a portion of their copper from Australia where they own mines and also purchase copper concentrate at the London Metal Exchange (LME). In 2007, Hindalco was also among the top 10 copper producers in the world by capacity.

While Hindalco itself has a very good stand and has proven its stability, post Novelis acquisition, the company?s share price has seen some fluctuations. However, if one is to look at the basics of Novelis, the value addition this purchase has given the company should hold them in good stead. Novelis is the largest aluminum product producer in the Europe, South America and Asia and are also the world leaders in recycling used aluminum beverage cans. They have recycled approximately 36 billion used cans in the last financial year. Having operations in 11 countries, they produce aluminum sheets and foil products for customers in the automotive, transportation, packaging, construction and prinking industries. Their key customers include, Anheuser-Busch Companies, affiliated to the Ball Corporation, Crown Cork & Steel Company and Rexam Plc. This not only has given the company a very good triple bottom line in recent years but also shows how beneficial this strategic acquisition can prove to be.

Bridging the gap

The company intends to use the net proceeds of this issue to fund a part of the repayment of bridge loan availed by AV Minerals (Netherlands) BV, an overseas subsidiary of the company, for the acquisition of Novelis. The company is expected to raise Rs 5,048 crore, out of which the issue expenses would be Rs 121.6 crore leaving net proceeds of Rs 4,926 crore or $1.12 billion. The overall cost of acquiring Novelis was $3.48 billion, which was paid for by internal accruals of $0.45 billion and debt raised by their subsidiary companies worth $3.03 billion. This is the loan that needs to be repaid by November 10, 2008 in full. The company intends to do the same by taking a $1 billion loan incurred by AV Minerals from a syndicate of banks including ABN AMRO, Citi, Deutsche Bank and SBI. However, which banks will provide how much money and from where will they be providing the same is yet to be clarified. Reports indicate that the loan will be taken with an interest of 280 base points. The company also has an unused amount of $0.40 billion from the January 2006 rights issue, and if the shareholders approve of it, they hope to change the objectives of that issue to utilise the money for repayment of loan.

This gives the company a total of $2.62 billion leaving them short by approximately $0.41 billion that internal accruals should make up for.

While the plans look ambitious to say the least, with the promoters planning to subscribe to their full extent being 31.43% of the issue, investors should feel secure seeing their confidence and past records. In an event that the issue is not fully subscribed for, the promoter and promoter group may apply for additional shares as long as their overall subscription does not go beyond 50% of this issue.

The lead managers of the issue include five banks that will be underwriting the issue and have agreed to subscribe to any of the shares which have not been subscribed for by the shareholders, and which cannot be subscribed for by the promoters. The Aditya Birla Group also might pick up some of the unsubscribed shares, leaving the bankers to effectively underwrite approximately 16%. This was concluded since Life Insurance Corp of India Ltd, which owns 11.13% and 200 foreign institutional investors holding 12% are expected to subscribe to the maximum as well.

Number talk

Hindalco in this rights issue is offering 525,802,403 equity shares at a ratio of three equity shares for every seven held, thus making it the biggest ever rights issue in India. The issue is priced at Rs 96 per share, which will allow the company to raise approximately Rs 5,048 crore (approx $1.14 billion). It is rare for companies to de-leverage their finances while they are financially stable, in this instance the sheer amount of loan already been taken and the amount that needs to be repaid are so large that they have had little option but to come out with a rights issue. While the current debt-equity ratio stands at 65:35, since this issue will result in a 42.8% dilution in liquidity, the debt-equity ratio will move to 45:55. While, having lower debt is always considered better, especially in present economic conditions, the company may have to dilute their equity than taking more debt, due to uncertainty in being able to repay. However, with Hindalco?s financial stability over the years that seems hard to believe, this move will however for the short to medium run dent the companies EPS. While the current market price is only a few rupees more than the issue price, this is mainly due to falling prices amidst uncertain commodity price stability as well as the overall economic condition. However if one were to take the companies average between their 52 week high and low, one can safely estimate a fair value of the share to be Rs. 140/share. Given this the company is offering the rights issue at a reasonable price, however many people have doubts on the subscription of this issue due to weak market sentiments and uncertain commodity prices. However most reports indicate that aluminum prices should pick up once we ride out this storm hopefully by the financial years 2010 and 2011. Also, with plans to invest almost Rs. 19,800 crore in the next three years to increase their production in different locations, the long run still looks good. By this time Novelis?s fixed income sale commitments would also be completed, giving Hindalco a fresh start.