Introduction

India- based Hindalco Industries ltd with annual revenue

of US $2.6 billion, subsidiary of Aditya Birla Vikram Birla group of companies, a $28 billion multinational conglomerate acquired US Canadian based company Novelis reporting a revenue of $10 billion. on May 16th 2007 Novelis was the global leader (in terms of volumes) in rolled products and provided sheets and foils to automotive and transportation, beverage and food packaging, construction and industrial, and printing markets, producing an estimated 19 per cent of the world's flat-rolled aluminum products.

Strategic Rationale for the deal

The acquisition of Novelis took Hindalco onto the global

stage Made Hindalco the worlds largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia. Hindalco would be able to produce the low cost aluminum from its plants in India and export it to plants of Novelis where it could be converted to Value-added products To move up the value chain and start producing valueadded products and hence leverage the low cost advantage it had in aluminum production

Financial Analysis Debt to Equity ratio

The debt to equity ratio was almost maintained in the

same figure inspite of nearly half of the funds for acquisition provided through debts
0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Mar/05 Mar/06 Mar/07 Mar/08 Mar/09 0.5 0.5 0.6 0.5 0.4

Interest Cover
it is seen that the ratio decreased by more than half

which was a not a good sign as it portrayed that the company had problems in generating enough cash flow to pay its interest
35 30 25 20 15 10 5 0 Mar/05 Mar/06 Mar/07 Mar/08 Mar/09 11.9 12.9 13.5 10.4 30

ROA, ROE and Asset Turnover

There was a huge decline in demand for aluminium
The entire aluminium industry was facing a downfall Though the sales increased, it was not increasing

proportionately to the increase in assets, reserves and funds There was a decline in ROA, ROE and asset turnover ratios

Return On Assets
14 12 10 8 6 4 2 0 Mar/05 Mar/06 Mar/07 Mar/08 Mar/09 6.6 10 9.7 11.7 10.2

Return On Equity
25 23.3 20 18.3 15 19.2 19.2

10

10.8

0 Mar/05 Mar/06 Mar/07 Mar/08 Mar/09

Asset Turnover
1.00 0.90 0.80 0.70 0.73 0.69 0.59 0.75 0.91

0.60
0.50 0.40 0.30 0.20 0.10 0.00 Mar/05 Mar/06 Mar/07 Mar/08

Mar/09

Debtors Turnover
The debtors turnover ratio or receivables turnover ratio

which is an activity ratio measuring how efficiently a firm uses its assets had a dramatic increase

80.00 70.00 60.00 50.00 51.24 59.43 46.13 35.08 72.24

40.00
30.00 20.00 10.00 0.00 Mar/05

Mar/06

Mar/07

Mar/08

Mar/09

Profit Margin
A dramatic decrease in the profit margin is also

evident by the fact that there was only a minimal increase in profit
14 12 10 8 6 4 2 0 Mar/05 Mar/06 Mar/07 Mar/08 Mar/09 10.4 9.2 7.7 12.1 12.4

Price Earning Ratio

A high P/E suggests that investors expected higher

earnings growth in the future compared to companies with a lower P/E

12 11.06 10 9.25

8
7.16 6 4 2 0 Mar/05 Mar/06 Mar/07 Mar/08 Mar/09 5.35 4.13

Global Impacts
Novelis was the global leader in aluminium rolled products

and aluminium can recycling, with a global market share of about 19%, and had sales centers all over the world including Asia , Europe, North and South America Hindalco had a 60 percent domestic share in the 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 was leverageable into becoming a globally strong player Novelis acquisition gave Hindalco an immediate scale and a global footprint

Market Synergies
The joint entity was expected to become insulated

from the fluctuation of LME aluminum prices The deal would give Hindalco a strong presence in recycling of aluminum business To double HIndalcos turnover in one fell swoop, it would have catapulted the group right to the threshold of the fortune 500 group of the companies

Market Synergies contd..

It was estimated that post acquisition, over 50 % of the

groups business would come from operations outside India, which was then 30 %, which would have marked an increased internationalization Novelis was processing around 3 million tonnes of aluminium a year. It was believed that the deal would catapult Hindalco's flat rolled product capacity from 0.2 million ton to 3.2 million ton per annum.

Product Synergy
Novelis deal would give Hindalco access not only to high-

end products but also to superior technology Hindalco had planned to triple aluminum output to 1.5 million metric ton by 2012 to become one of the world's five largest producers Aluminum is infinitely recyclable and recycling it requires only 5% of the energy needed to produce primary aluminum The revenue of Hindalco was very much dependent on the aluminum prices and when the prices were high they would make a larger margin, this was not the case with rolled aluminum business which usually had a constant margin.

After effects of the deal

In 2009, Hindalco the worlds fifth-largest aluminum

maker, ended up paying higher interest rates on the $982 million loan taken for the acquisition of Novelis. Novelis reported losses of $32million, excluding goodwill impairment, in the quarter-ended December, higher than the loss of $22 million made in the corresponding period of the previous year The company had planned to cut production by 13-15 per cent and manpower by 10 per cent to reduce the losses.

After effects of the deal contd..

Shipment of flat rolled products declined nearly 13 per cent

due to demand contraction in key markets. The revenue for the period declined by 20 per cent to $2.2 billion on the back of lower volume and decreased metal prices. In 2008, Hindalco took a syndicated loan of $982 million (Rs 4,910 crore at current rate) from 11 foreign banks to repay the bridge loan taken two years ago for the Novelis acquisition. Hindalco had earlier taken a Rs 6,000 crore debt for organic growth. Besides, it has Rs 3,000 crore short-term debt in the form of sellers credit. The company said both these loans were covenant- light and they did not face any challenge on these loans

After effects of the deal contd..

Gradually, Hindalco recovered from the downfalls

caused by this acquisition. It has been a slow and painstaking limp back to recovery for Novelis In one of the largest capital repatriations by an Indian company after a foreign acquisition, the Aditya Birla group flagship has initiated a programme to financially integrate the two companies internally called Project Nalanda and make cash fungible This is a good strategy for Hindalco to tap cash trapped in Novelis that could not be accessed so far due to restrictive loan covenants

After effects of the deal contd..

The repatriation means Hindalco has recovered half

the $3.5 billion it spent to buy Novelis Hindalco owns 100 per cent of Novelis for just $1.8 billion today. This return of capital represents almost 50 per cent of the initial acquisition cost, achieved within four years of the buyout Hindalco is today 50 per cent of the Aditya Birla group. Its target is $65 billion in group turnover by 2015 from the current $30 billion Project Nalanda would help in paving the way to take the group to that target