2015037

Pooja Jain

Medco Health Solutions Inc

Express Scripts Holding

Hindalco: The Novelis Acquisition

We look upon the Aluminum business as a core business that has enormous growth potential
in revenues and earnings. Our vision is to be a premium metals major, global in size and
reach with a passion for excellence. The acquisition of Novelis is a step in this directioni
Kumar Mangalam Birla, Chairman, Hindalco.
On May 15, 2007, Hindalco Industries Ltd announced the completion of its acquisition of
Novelisii. The transaction made the company the worlds largest Aluminum Rolled Products
Company, one of the largest producers of primary Aluminum in Asia, and India's leading
producer of copper. Novelis would operate as a subsidiary of Hindalco. The Company entered
into an agreement with Novelis on February 10, 2007 to acquire the Company in an all-cash
transaction that valued Novelis at approximately $6.0 billion. Under the terms of the
agreement, Novelis shareholders would receive $ 44.93 in cash for each outstanding common
share. Novelis shareholders approved the transaction at a special meeting on the May 10th.
Hindalco was the flagship Company of the Aditya Birla Group, a multinational conglomerate
from India with annual revenues of $14billion and a market capitalization in excess of $23
billion.
The transaction was accomplished by way of a statutory plan of arrangement under the
Canadian law. The Company, through its wholly-owned subsidiary AV Metals Inc., acquired
75,415,536 common shares of Novelis, representing 100 percent of the issued and
outstanding common shares. Immediately after closing, AV Metals Inc. transferred the
common shares of Novelis to its wholly-owned subsidiary- AV Aluminum Inc. Upon closure
of the transaction, Novelis stock ceased trading on the New York Stock Exchange. De-listing
on the New York Stock Exchange and the Toronto Stock Exchange were expected to take
place shortly thereafter.
Analysts and investing community were apprehensive about the transaction. Some analysts
wondered whether Hindalco was overpaying for the acquisition.
Background of the Aluminum Industry
Aluminum, a silvery white metal, was the most abundant metallic element in the earths crust
and the most widely used non-ferrous metal. Aluminum did not occur in the metallic form in
nature. Bauxite was the principal Aluminum ore from which Aluminum was obtained.
Approximately 25% of the worlds Aluminum production came from recycling Aluminum
scrap and rest 75% from primary production.

Its unique combination of properties like light weight, strength, flexibility, recyclability made
Aluminum ideal for a wide range of applications. Aluminum found a number of applications
in packaging (e.g. beverage cans), transport (e.g. aircraft manufacturing, alloy wheels),
electrical equipments, building and architecture (e.g. windows, roofing).
The price of primary Aluminum (ingots/billets) was market determined at LME (London
Metal Exchange) whereas the upstream products prices were determined by individual
companies depending on the product quality. Prices of alumina were market determined but
not traded at LME. That is, alumina prices were based on the prices of Aluminum.
Historically Alumina traded at 13-15 percent of the price of Aluminum.
Overview of Domestic Aluminum Industry
Indias primary Aluminum industry was dominated by three companies that accounted for the
entire production. They were: National Aluminum Company Ltd (NALCO), Hindalco
Industries Ltd. and Sterlite Industries Ltd 1. Hindalco led the industry with a major share of
the production.
Two reasons were responsible for high concentration in this industry:
High Capital Requirement: The minimum economic size of an alumina refinery was around
1 million tonnes per annum and that of Aluminum smelter was 250,000 tonnes per annum.
Such size would require investment of over $1 billion each.
High Power Intensity: Aluminum smelting was energy intensive (1 tonne of Aluminum
required 14000-15000 kwh of power). An Aluminum manufacturer would require continuous
power supply. As a result, all companies had their own captive power plants. The captive
power plants added to the capital investment.
Novelis Backgroundiii
Novelis was the world leader in aluminum rolling, producing an estimated 19 percent of the
world's flat-rolled aluminum products. It was the largest producer of rolled products in
Europe and South America, and the second largest producer in both North America and Asia.
It produced Aluminum sheet and foil products for customers in high-value markets including
automotive, transportation, packaging, construction and printing. Its customers included
General Motors, Ford, Anheuser-Busch, Alcan, Kodak, Coca Cola among others. Novelis ten
largest customers accounted for 40% of net sales in 2005.
Novelis was also the world leader in the recycling of used aluminum beverage cans.
Annually, it recycled around 35 billion used beverage cans. Novelis operated in 11 countries
with approximately 12,300 employees. Exhibits 1, 2, and 3 present Novelis financial
statements.
Hindalco Backgroundiv
1

The other producers of primary Aluminum included Indian Aluminum (Indal), which merged with Hindalco,
Bharat Aluminum (Balco) and Madras Aluminum (Malco), the erstwhile Public Sector Undertakings, were
acquired by Sterlite Industries

Hindalco Industries Limited, the Mumbai based flagship company of the Aditya Birla Group,
was structured into two strategic businesses- Aluminum and Copper. Established in 1958,
Hindalco commissioned its Aluminum facility at Renukoot in the Indian state of Uttar
Pradesh in 1962. It had grown to become the country's largest integrated producer of
Aluminum and ranked in the top quartile of low cost producers in the world. Hindalcos stock
was traded on the Bombay Stock Exchange, the National Stock Exchange of India Limited
and the Luxembourg Stock Exchange. A key aspect of Hindalco's strategy was continuous
growth. The Company had taken two major initiatives in this direction in the recent past. In
1999, the company acquired a 74.6 percent controlling stake in Indian Aluminum Co. Ltd.
(INDIAL), a leader in the alumina and semi-fabricated business. The second of the initiatives
was a brown-field expansion of facilities at a cost of Rs. 18b. The expansion added 100,000
TPA to smelting capacity along with a 210,000 TPA increase in Alumina Refining Capacity
and matching augmentation of power generation capacity.
It enjoyed a domestic market share of 42 percent in primary Aluminum, 63 percent in rolled
products, 20 percent in extrusions, 44 percent in foils and 31 percent in wheels. Hindalco had
launched several brands like Aura for alloy wheels, Freshwrapp for kitchen foil and Ever Last
for roofing sheets in the recent years 2. The copper plant produced copper cathodes,
continuous cast copper rods and precious metals like gold, silver and platinum group metal
mix. Sulphuric Acid, Phosphoric Acid, Di-Ammonium Phosphate, other Phosphatic fertilisers
and Phospho-Gypsum were also produced at this plant. Hindalco Industries Limited owned a
51 percent shareholding in Aditya Birla Minerals, which had mining and exploration
activities in Australia. The company owned two R&D centres at Belgaum, Karnataka and
Taloja, Maharashtra3.
Birla Copper, Hindalco's copper division, was situated in Dahej in the Bharuch district of
Gujarat. The copper unit at Dahej was the worlds largest, single location copper smelter with
a smelting capacity at 0.5 m TPA. The plant was backed by captive power plants, oxygen
plants and by-product facilities for fertilizers and precious metals. A captive jetty with cargohandling capacity of over 4 m TPA facilitated easy import of copper concentrate and other
raw materials.
In addition, Hindalco held equity stakes in many companies like Idea Cellular, ABML
Australia, Aditya Birla Nuvo, Grasim, Bihar Caustic and Chemicals and NALCO4. Exhibits
4, 5, & 6 present Hindalcos financial statements
The Novelis Acquisition Opportunity
Novelis was formed as a result of the spin off from Alcan in January, 2005. In January 2005,
Novelis acquired the Aluminum rolled products business from Alcan. Novelis had a
conversion model i.e. it purchased Aluminum ingots (at LME) and converted them into rolled
products and sold these at certain margins. It enjoyed pass-through benefits. That is, it was
not affected by the volatility in LME prices as it sold its products at a spread over LME
2

Hindalco has since discontinued manufacturing alloy wheels

Hindalco had announced capacity expansion plans of Rs 250billion apart from the Novelis acquisition.
Agarwal, Swati, Hindalco Industries, Edelweiss India Equity Research, Mar 2007; Baji, Prasad, Hindalco
Industries, Edelweiss India Equity Research, Nov 2007
4
Analysts valued these holdings at Rs 51 per share. Shah, Chirag and Ritesh Shah, Hindalco Industries, IDFC
SSKI, Nov 2007
3

prices. Raw material accounted for nearly 80% of its costs followed by labor and freight
(10%) and other costs.
Technological capabilities and meeting customer specification were key success factors in the
aluminum rolling industry. Technology was considerably capital intensive and setting up of a
plant took 3-4 years. Hence, Hindalco considered the acquisition of Novelis rather than
setting up in-house facilities. With this acquisition Hindalco would get access to the world
class technology and client base of Novelis.
With operations spread across 11 countries, Novelis had a broad client base. With proximity
to its clients, the company could save considerably on freight costs and cut down lead times.
Apart from the reduction in costs, the merged entity could provide better sales support to
customers.
Since Hindalco had cheap supplies of bauxite and coal, the purchase of a downstream
producer like Novelis would provide the same benefits of other mega mergers like that of
Tata Steel and Corus Group.
On the flip side, Novelis had ended up inheriting a debt load of almost $2.9 billion on a
capital base of less than $500 m during the spin-off process. Though it marginally reduced
debt, it made some losses too. On a net worth of $322 m, Novelis had a debt of $2.33 billion
with a debt-equity ratio of 7.2.
In order to attract more business from soft drink manufacturers, Novelis promised four
customers that it would not increase product prices even if raw material prices went up
beyond a point5. Raw material prices shot up by 39 percent a few months after Novelis signed
those contracts. Novelis was forced to sell its products at lower prices than raw material costs
to these four customers. These four customers like Coca Cola and General Motors accounted
for 20 percent of Noveliss $9-billion revenues. The managements judgement led to losses of
$350 million in 2006.
Structuring and Pricing a Deal
Financing Structure Hindalco was to acquire Novelis in an all-cash transaction, which
valued Novelis at approximately $6 billion, including $2.4 billion of debt v. Under the terms
of the agreement, Novelis shareholders would receive $44.93 in cash for each outstanding
common share at a 15 percent premium to the market price. AV Metals the A V Birla
group's Canada-based special purpose vehicle (SPV) - would infuse $3.5 billion to finance
Hindalco's proposed acquisition. Putting aside the $2.4 billion debt burden of Novelis, the
cash component for financing the deal stood at $3.5 billion. Of this amount, AV Metals would
take loans worth $2.8 billion from three financial institutions, namely UBS, ABN AMRO and
Bank of America. This included a bridge loan of $1.4 billion at a coupon rate of 7.2 percent.
These three institutions would underwrite the debt with UBS as the lead lender. UBS would
be the financial advisor to Hindalco. Essel Mining & Industries, a closely held company of
the group, would bring in $300 million while Hindalco would mobilize $ 450 million from its
treasury operations.
5

These contracts would expire at varying times till January 2010. Analysts at UBS Investment research
estimated the present value of these losses at Rs 21600 m. See Sachdev, Sunita, Hindalco Industries, UBS, Nov
2007

Novelis already carried $2.4 billion of debt comprising of $1 billion term loans and $1.4
billion high-yield loans. The deal, of course, would increase the debt-equity ratio of Hindalco.
Also, over 50 per cent of the group's business would come from operations outside India after
the acquisition. Exhibits 7 and 8 present the financing structure of the deal, financial market
data for India and the US and firm level data for Hindalco.
Strategy This acquisition was a good strategic move for Hindalco. Hindalco would be able to
ship primary Aluminum from India and make value-added products. Kumar Mangalam Birla,
Chairman of the Aditya Birla Group, said,
"The acquisition of Novelis is a landmark transaction for Hindalco and our Group. It is in
line with our long-term strategies 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 Aluminum producer with low-cost
alumina and Aluminum production facilities combined with high-end Aluminum rolled
product capabilities. The complementary expertise of both these companies will create and
provide a strong platform for sustainable growth and ongoing success."vi
Acting Chief Executive Officer of Novelis, Mr. Ed Blechschmidt, said,
"After careful consideration, the Board has unanimously agreed that this transaction with
Hindalco delivers outstanding value to Novelis shareholders. Hindalco is a strong, dynamic
company. The combination of Novelis' world-class rolling assets with Hindalco's growing
primary Aluminum operations and its downstream fabricating assets in the rapidly growing
Asian market is an exciting prospect. Hindalco's parent, the Aditya Birla Group, is one of the
largest and most respected business groups in India, with growing global activities and a
long-term business view."vii
Synergy 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 Aluminum rolled products and Aluminum can recycling, with a global market share
of about 19 per cent. Hindalco has a 60 per cent 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 Aluminum in the world is leverageable into becoming a globally strong
player. The Novelis acquisition will give us immediate scale and a global footprint."viii
Novelis operated on a pure-converter model, which offered steady margins as pricing was
done either to pass-through costs or as a margin over metal. This assured steady cash
flows, and, more importantly, the company had no LME price risk. In contrast, Hindalco
operated on a model with margins directly correlated with LME prices, with higher LME
prices translating into higher margins and vice versa. Hence, under an ideal scenario (without
the price ceiling contracts), Hindalco-Novelis would be in a superior proposition offering
stable cash flows. Further, Hindalco could leverage the same in emerging markets.
Analysts from Merrill Lynch, however, speculated that the costs could outweigh the benefits

of the deal6. They pointed out that margins would be sharply squeezed during periods of
rising Aluminum prices as selling prices of finished products do not increase
commensurately. For instance, price ceilings on beverage cans in the U.S. hurt Novelis
margins - in the first nine months of 2006 the company lost $ 170 million.
Stewart Spector, an Aluminum-industry consultant with offices in New York and Florida
echoed this view:
"In my opinion, they are overpaying. It seems to me that $6 billion is an awful big premium
to pay for a messy operation."ix
Exhibit 9 presents the consolidated free cash flow and dividend forecast for Hindalco. Exhibit
10 presents the valuation multiples of Aluminum and Copper Companies.
Demand Analysis
Domestic Indias consumption pattern of Aluminum was significantly different from the rest
of the world. In India, Electrical sector was the major consumer of Aluminum (31%)
followed by the transport sector (18%) whereas internationally, transport (26%) and
packaging (20%) sectors dominated the consumption. The consumption pattern in India was
witnessing a shift from the Electrical sector to the transport sector. The demand from the
Electrical sector had come down from 52% in 1980-81 to 31% in 2004-05 whereas the
demand from the Transport sector had increased from 11% to 18% in the same period.
Going forward, Indias consumption pattern was also expected to be in line with the worlds
consumption pattern as transport and packaging sectors were expected to become the demand
drivers for the Indian Aluminum industry.
India had been a net importer of Aluminum since 2005-06. With various projects lined up by
Indian companies analysts expected huge capacities to come up by 2010-11. India was
expected to be a net exporter from 2010-11 with the addition of new capacities. Analysts
expected a deficit of 0.05 m tonnes in 2006-07 and a surplus of 0.2 m tonnes in 2011-12.
Globalx
In a Ringsider article, analyst Adam Rowley of Macquarie Bank Ltd. estimated that the
global Aluminum consumption would increase by 7.5 percent to 34.3 million tonnes in 2006
whereas global production would increase by only 6.3 percent. He projected 2007
consumption to increase by 4.9 percent to 36 million tonnes and production to exceed
demand by 6 percent or 36 million tonnes.
The world Aluminum market had always maintained a tight demand/supply condition. A
considerable surplus was expected in 2010 and 2011 starting with a minimal deficit in 2009.
This was due to significant capacity additions worldwide, especially in Asian countries.
6

Luthra, Vandana, and Vishal Nathany, Hindalco Industries, Merrill Lynch, Mar 2007; Luthra, Vandana
Hindalco Industries, Merrill Lynch, Sep 2007; Luthra, Vandana, and Bhaskar Basu, Hindalco Industries, Merrill
Lynch, Feb 2009

Analysts forecasted a surplus of 0.75 m tonnes in 2011 and expected Aluminum prices to
come down in the medium term.
Analysts expected world industrial production growth to remain above 4 per cent in the
following year. In Europe, a pick-up in investment spending and some ebbing of high
unemployment rates was expected to encourage domestic demand. The Japanese economy
was also likely to improve in 2008. The rapid pace of industrialization and urbanisation in
China, India and other emerging markets implied an increased consumption of Aluminum.
This was expected to support prices over the medium term. The Chinese demand for metals
like Aluminum had soared as these were a key input in construction, packaging and
automotive manufacturing. However, analysts were sceptical about the Chinese economy as
Foreign Direct Investment was slowing down.
The 16 countries that made up Central and Eastern Europe (CEE) included some of the
worlds fastest growing economies. Average GDP growth rate in the CEE was around 6 per
cent per annum between 2002 and 2006. This trend was widely expected to continue in the
foreseeable future. With economic growth came a greater demand for metals and other
materials required to support industrial and infrastructure development. The region had also
attracted considerable foreign investment and key manufacturing industries had grown
rapidly.
Stock Market Reaction
Stock markets reacted negatively to the acquisition as investors considered the acquisition to
be a drain on Hindalcos profitability due to overvaluation and high leverage of Novelis 7.
That Novelis was a loss making company also worked against Hindalco. Stock price of
Novelis, on the other hand, jumped 15 percent on the New York Stock Exchange following
the news of the acquisition. Exhibits 11 and 12 present the stock price movements of both the
companies.
Upon the announcement of the deal, brokerage houses reacted in a variety of ways: Asit
Mehta Intermediates and UBS Investment Research gave a Buy recommendation; IL&FS
Investmart gave an Accumulate recommendation; SSKI gave a Neutral recommendation;
Edelweiss Capital gave a Reduce recommendation; Citigroup and Merrill Lynch gave a
Sell recommendation.

Hindalcos stock traded at Rs 147 during May 2007. It actually increased marginally to Rs 148.85 upon
announcement.

Exhibit 1: Novelis Consolidated and combined statements of operations and

comprehensive Income (loss) for the year ended December 31 (in $ million)
Particulars ( In $ m except per share figures)

2006

2005

2004

2003

Net Sales

9849

8363

7755

6221

9317
410
0
233
40
19
0
206
-16
-82
10127
-278

7570
352
40
230
41
10
7
194
-6
-299
8139
224

6856
289
0
246
58
20
75
48
-6
-62
7524
231

5482
255
0
222
62
8
4
33
-6
-49
6011
210

-4
-274

107
117

166
65

50
160

-1
-275
0
-275

-21
96
-6
90

-10
55
0
55

-3
157
0
157

168
-46
12
134
-141

-155
0
-17
-172
-82

30
0
-26
4
59

102
0
1
103
260

3.71
0
-3.71

1.29
-0.08
1.21

0.74
0
0.74

2.12
0
2.11

-3.71
0
-3.71
0.2

1.29
-0.08
1.21
0.36

0.74
0
0.74
0

2.12
0
2.11
0

Cost of Goods Sold

Selling, general and administrative expenses
Litigation settlement net of insurance recoveries
Provision for depreciation and amortization
Research and development expenses
Restructuring Charges
Impairment Charges on long-lived assets
Interest expense and amortization of debt issuance costs net
Equity in net income of non-consolidated affiliates
Other income net
Income before provision for taxes on income, minority interests share
and cumulative effect of accounting change
Provision for taxes on income
Income before minority interests share and cumulative effect of
accounting change
Minority Interest's Share
Net income before cumulative effect of accounting change
Cumulative effect of accounting change net of tax
Net income
Other comprehensive income (loss)net of tax
Currency translation adjustment
change in fair value of effective portion of hedges net
Change in minimum pension liability
Other comprehensive income (loss) net of tax
Comprehensive income (loss)
Earnings per share:
Basic:
Net income before cumulative effect of accounting change
Cumulative effect of accounting change net of tax
Net income per share basic
Diluted:
Net income before cumulative effect of accounting change
Cumulative effect of accounting change net of tax
Net income per share diluted
Dividends per common share
Supplemental information for 2005 only:

Net income attributable to the consolidated and combined results of

Novelis from
January 6 to December 31, 2005increase to Retained earnings
Net loss attributable to the combined results of Novelis from January 1
to January 5,
2005 decrease to Owners net investment
Net income

119
-29
90

Source: Company Annual Reports

Exhibit 2: Novelis Consolidated Balance Sheet as on December 31(in $m)

Particulars
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable (net of allowances of $26 in 2005 and $33 in
2004)
third parties
related parties
Inventories
Prepaid expenses and other current assets
Current portion of fair value of derivative contracts
third parties
related parties
Deferred income tax assets
Total current assets

2006

2005

2004

73

100

31

1321
21
1391
42

1098
33
1126
66

770
798
1226
36

106
0
9
2963

194
0
8
2627

22
134
0
3017

Property and equipment net

Goodwill
Intangible assets net
Investment in and advances to non-consolidated affiliates
Fair value of derivative contracts net of current portion
Deferred income tax assets
Other long-term assets
third parties
related parties
Total assets

2143
236
20
150
44
76

2,160
211
21
144
90
21

2,347
256
27
122
3
12

101
59
5792

131
71
5,476

66
104
5,954

Source: Company Annual Reports

Exhibit 2 (Continued)
LIABILITIES AND SHAREHOLDERS/INVESTED
EQUITY
Current liabilities
Current portion of long-term debt
third parties
related parties
Short-term borrowings
third parties
related parties
Accounts payable
third parties
related parties
Accrued expenses and other current liabilities
Deferred income tax liabilities
Total current liabilities
Long-term debt net of current portion
third parties
related parties
Deferred income tax liabilities
Accrued post-retirement benefits
Other long-term liabilities
Commitments and contingencies
Minority interests in equity of consolidated affiliates
Shareholders/invested equity
Preferred stock, no par value; unlimited number of first
preferred and second preferred shares authorized; none issued
and outstanding
Common stock, no par value; unlimited number of shares
authorized; 74,005,649 shares issued and outstanding as of
December 31, 2005
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Owners net investment

2006

2005

2004

3
0

1
290

27
0

229
312

1542
44
508
61
2432

866
38
641
26
1,601

492
342
425
1
2,092

2158
0
81
425
343
5439

2,600
0
186
305
192
4,884

139
2307
249
284
188
5,259

158

159

140

398
-198
-5
0

425
92
-84
0

0
0
88
467

144
133

Total shareholders/invested equity

Total liabilities and shareholders/invested equity

195
5792

433
5,476

555
5,954

Source: Company Annual Reports

Exhibit 3: Novelis, Consolidated and combined statements of Cash Flows (in $ million)
Particular
OPERATING ACTIVITIES
Net income
Adjustments to determine net cash provided by operating
activities:
Cumulative effect of accounting change net of tax
Depreciation and amortization
Net (gains) losses on change in fair market value of
derivatives
Litigation settlement net of insurance recoveries
Deferred income taxes
Amortization of debt issuance costs
Provision for uncollectible accounts
Equity in net income of non-consolidated affiliates
Dividends from non-consolidated affiliates
Minority interests share of net income
Impairment charges on long-lived assets
Stock-based compensation
Gain on sales of businesses and investments and assets
net
Changes in assets and liabilities (net of effects from
acquisitions)
Accounts receivable
third parties
related parties
Inventories
Prepaid expenses and other current assets
Other long-term assets
Accounts payable
third parties
related parties
Accrued expenses and other current liabilities
Accrued post-retirement benefits
Other long-term liabilities
Other net
Net cash provided by operating activities
INVESTING ACTIVITIES
Capital expenditures

2006

2005

2004

2003

-275

90

55

157

0
233
-63

6
230
-269

0
246
-69

0
222
-20

0
-77
13
4
-16
5
1
0
9
-6

40
30
17
3
-6
0
21
7
3
-17

0
97
0
6
-6
0
10
75
2
-5

0
-20
0
4
-6
0
3
75
2
-28

-142
1
-206
25
6

-91
-1
52
18
-13

-94
72
-144
-4
-7

4
190
-18
-3
-28

519
4
-64
-24
69
0
16

144
2
167
13
-1
4
449

-7
40
-14
-42
29
-32
208

34
-46
-63
43
5
8
444

-116

-178

-165

-189

Disposal of Business-net
Proceeds from sales of assets
Changes to Investment in and advances to non-consolidated
affiliates
Proceeds from (advances on) loans receivable net
third parties
related parties
Premiums paid to purchase derivative instruments
Net proceeds from settlement of derivative instruments
Net cash provided by (used in) investing activities

-7
38
3

19
0

17
0

33
0

0
37
-4
242
193

19
374
-57
148
325

0
874
0
0
726

0
-1210
0
0
-1377

2006

2005

2004

2003

41
0

2779
0

575
1561

500
471

-353
0

-1822
-1180

-993
-5

0
0

103
0
-15
-15
5
-11
2

-145
-302
-27
-7
72
-71
0

-774
221
0
-4
-1512
0
0

577
-29
0
0
-592
0
0

-243
-34
7

-703
71
-2

-931
3
1

927
-6
2

100
73

31
100

27
31

31
27

201
68
3

153
39
3

76
70
0

41
19
0

Exhibit 3 Continued
FINANCING ACTIVITIES
Proceeds from issuance of new debt
third parties
related parties
Principal repayments
third parties
related parties
Short-term borrowingsnet
third parties
related parties
Dividends common shareholders
Dividends minority interests
Net receipts from (payments to) Alcan
Debt issuance costs
Proceeds from issuance of Common Stock in
connection with stock plans
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Effect of exchange rate changes on cash balances held
in foreign currencies
Cash and cash equivalents beginning of year
Cash and cash equivalents end of year
Supplemental disclosures of cash flow information:
Interest paid
Income taxes paid
Principal payments on capital lease obligations
(included in principal repayments third parties)
Supplemental schedule of non-cash investing and
financing activities relating to the spin-off transaction
and post-closing adjustments
Other receivables
Short-term borrowingsrelated parties

433
-57

Long-term debt related parties

Capital lease obligation
Additional paid-in capital
Supplemental schedule of non-cash
(Pechiney acquisition):
Assets
Liabilities
Net assets allocated to us from Alcan

32
52
-109

-43
transaction

8
0
8

-197
28
-169

Source: Company Annual Reports

Exhibit 4: Hindalco Consolidated Balance Sheet (in Rs ten m)

SOURCES OF FUNDS:
Share Capital
Reserves Total
Total Shareholders Funds
Minority Interest
Secured Loans
Unsecured Loans
Total Debt
Total Liabilities
APPLICATION OF FUNDS:
Gross Block
Less: Accumulated Depreciation
Less: Impairment of Assets
Net Block
Lease Adjustment
Capital Work in Progress
Investments
Current Assets, Loans & Advances
Inventories
Sundry Debtors
Cash and Bank
Loans and Advances
Total Current Assets
Less: Current Liabilities and Provisions
Current Liabilities
Provisions
Total Current Liabilities
Net Current Assets
Miscellaneous Expenses not written off
Deferred Tax Assets
Deferred Tax Liability

2004

2005

2006

141.29
6908.95
7050.24
93.21
2438.51
1285.15
3723.66

141.59
7523.35
7664.94
85.77
3231.01
1699.8
4930.81

147.38
9238.33
9385.71
129.52
3117.81
3161.19
6279

10867.11

12681.52

15794.23

10258.51
3041.28
0
7217.23
0
711.56
1865.57

10953.17
3806.56
99.93
7046.68
0
1638.69
2955.85

13443.26
4495.77
104.38
8843.11
0
1040.28
3163.21

1703.37
751.73
283.12
1039.53
3777.75

2697.04
840.44
473.05
941.59
4952.12

4497.54
1305.66
1042.34
1032.63
7878.17

1295.29
233.94
1529.23
2248.52
19.49
3.67
1198.93

1881.23
909.85
2791.08
2161.04
13.5
30.4
1164.64

2886.12
1024.96
3911.08
3967.09
8.68
308.43
1536.57

-298
170
-128

Net Deferred Tax

-1195.26

-1134.24

-1228.14

Total Assets

10867.11

12681.52

15794.23

2065.02

831.85

1831.87

Contingent Liabilities
Source: Company Annual Reports

Exhibit 5: Hindalco Income Statement (in Rs ten m)

Particulars

2003

2004

2005

2006

Total income
Sales
Industrial sales
Income from non-financial services
Income from financial services
Interest
Dividends
Treasury operations
Other income
Prior period income & extraordinary income
Change in stock

5734.69
5499.02
5497.29
1.73
205.47
86.35
39.61
73.55
25.67
4.53
23.68

7064.82 10815.59 12772.55

6821.23 10465.17 12485.92
6789 10408.02 12417.27
32.23
57.15
68.65
238.84
163.47
200.05
121.15
29.4
31.23
37.88
79.43
108.7
79.81
54.64
60.12
0
0
8.74
4.75
186.95
77.84
101.94
255.65
1036.3

Total expenses
Raw material expenses
Purchase of finished goods
Power, fuel & water charges
Compensation to employees
Indirect taxes
Royalties, technical know-how fees, etc.
Lease rent & other rent
Repairs & maintenance
Insurance premium paid
Outsourced mfg. jobs (incl. job works, etc.)
Outsourced professional jobs
Directors' fees
Selling & distribution expenses
Travel expenses
Miscellaneous expenses

5176.23
2522.68
0
666.46
297.46
518.17
14.56
22.37
43.4
30.99
7.96
0.63
0.03
165.7
18.15
82.36

6327.83
3282.45
0
935.7
325.27
614.09
1.08
15.14
56.72
33.53
24.87
0.67
0.03
142.51
20.84
69.37

9741.88
4900.53
17.13
1534.79
419.19
960.44
4.12
12.31
113.55
36.5
84.81
0.97
0.04
238.85
31.31
116.52

12153.3
6906.38
20.42
1820.32
593.18
1091.09
30.89
15.13
195.08
38.57
87.5
1.12
0.04
249.62
32.96
124.74

0.77
146.73

2.19
0

0
10.59

28.97
77.58

Fee based financial service expenses

Treasury operations expenses

Total provisions
Write-offs
Less: Expenses capitalised
Less: DRE & expenses charged to others
Prior period & extraordinary expenses
Interest paid
Financial charges on instruments
Expenses incurred on raising deposits/debts
Depreciation
Amortisation
Provision for direct taxes
PAT

0.53
6.5
78.19
73.62

0.48
0.01
21.24
86.71

3.2
0.38
56.42
4.88

5.22
0.92
42.86
295.71

16.67
178.59
0.12
1.29
268.67
0
317.25
582.14

0.18
186.46
0
0
317.45
0
406.74
838.93

9.1
199.2
0
0
463.26
0
646.39
1329.36

5.22
200.09
0
0
516.68
0
450.15
1655.55

Source: Company Annual Reports

Exhibit 6: Hindalco Cash Flow Statement (in Rs ten m)

Particulars
Net cash flow from operating activities (indirect
method)
Net profit before tax & extra ordinary income
Operating cash flow before working capital
changes

2003
903.72

2004
1112.87

2005
1760.93

2006
711.36

1062.70
1275.84

1245.67
1515.17

1913.29
2292.83

2107.13
2616.58

Cash flow generated from operations

1200.57

1271.79

1704.99

1008.07

Cash flow before extraordinary items

882.57

1112.87

1704.99

711.25

-1318.81
222.95
-192.14

-1165.97
-99.78
-152.88

-2008.94
396.12
148.11

-1327.99
1128.78
512.15

657.85
465.71

444.56
291.68

291.67
439.78

439.78
951.93

Net cash inflow/(outflow) from investment activities

Net cash inflow/ (outflow) from financing activities
Net cash inflow/(outflow) due to net increase/
(decrease) in cash & cash equivalents
Cash flow -- opening balance
Cash flow -- closing balance
Source: Company Annual Reports

Exhibit 7: Financing Structure of the deal ($m)

Number of shares (m)
Price per share ($)

7 4.7
44.93

EV

6216

Debt

2860

Equity value

3356

Financed by:
Bridge finance for 18 months

2906

Equity/ preferred stock/other securities

in wholly owned subsidiary

450

Total

3356

Exhibit 8: Financial Market Data India and US

India
7%
9%

10 Year T Bond Rate

Market Risk Premium

US
3.24 %
7.5 %

Hindalco
Beta
Debt/Capital
Tax rate
Average cost of debt

1.15
0.39
34%
7.4%8

Exhibit 9: Consolidated Free Cash Flow Forecast for Hindalco (Rs m)

2007

2008

2009

2010

2011

Operating Cash Flow

39,607

46,417

50,601

39,648

53,433

Working Capital Changes

(5347)

7582

(46,834)

31,443

(10,542)

Capital Expenditure

(21,905)

(27,507)

(22,647)

(50,368) (19,306)

Free Cash Flow

12,354

26,493

18,881

20,723

23,585

Number of Shares m

1111

2.35

(0.297)

Source: India Daily, Kotak Institutional Equities, Feb 2009 and June 2009

Free Cash Flow/Share Rs

11.99

(131.47)

7.47

Dividend / Share Rs

1.67

1.8

1.9

This was the prevailing yield on 10 year AAA rated corporate bonds in 2006-07

2.0

Source: Luthra, Vandana, and Vishal Nathany, Hindalco Industries, Merrill Lynch, Mar 2007; Luthra, Vandana
Hindalco Industries, Merrill Lynch, Sep 2007; Luthra, Vandana, and Bhaskar Basu, Hindalco Industries, Merrill
Lynch, Feb 2009

Exhibit 10: Valuation multiples of Aluminum and Copper Companies

EV/EBITDA
Peers

2008E

2009E

Alcoa Inc
Century Aluminum Company
Aluminum Corp of China Ltd-H
Antofagasta plc
Vedanta Resources Plc

6.54
5.46
19.07
5.05
5.19

6.41
5.29
18.31
6.49
4.50

Average

8.26

8.20

8.52

8.68

Hunan non-ferrous metals-H

Jiangxi Copper Company Ltd-H
Southern copper corp
Freeport-Mcmoran copper
Xstrata plc

9.72
15.75
6.83
4.41
6.91

10.87
17.10
7.87
5.01
7.41

Average

8.72

9.65

2008E 2009E
International Aluminum Companies

Indian Aluminum Company

National Aluminum Co Ltd
Copper Companies

Source: Mehta, Chintan, Hindalco Industries Ltd, Asit C Mehta Intermediates, Dec 31, 2007

Exhibit 11: Stock Price History of Hindalco (Bombay stock Exchange)

Source: Yahoo Finance

Exhibit 12: Stock Price History of Novelis (NYSE)

Source: www.stockcharts.com

References
1.
2.
3.
4.

Agarwal, Swati, Hindalco Industries, Edelweiss India Equity Research, Mar 2007
Baji, Prasad, Hindalco Industries, Edelweiss India Equity Research, Nov 2007
Brebner, Daniel et al, Hindalco Industries, UBS, Mar 2008
Daga, Giriraj, Hindalco Industries Ltd: Hindalco-Novelis Merger Update, Khandwalla
Securities, Feb 14, 2007
5. Energy Management Policy Guidelines for Energy Intensive Industry of India,
Chapter 3, pp 13-36 by Bureau of Energy Efficiency
6. Heather Timmons, "Indian Metals Company to Buy Canadian Rival," International
Herald Tribune, Feb 11, 2007
7. Hunt, Brook, The Long Term Outlook for Aluminum, Brook Hunt and Associates Ltd.
2007
8. India Daily, Kotak Institutional Equities, Feb 2009
9. India Daily, Kotak Institutional Equities, June 2009
10. Iyengar, Suresh P "Hindalco Deal May Not Impact Aluminum Prices," The Hindu
Business Line, February 13, 2007
11. Kuvelkar, Hitesh, Hindalco Industries, First Global Research, May 2009
12. Luthra, Vandana, and Vishal Nathany, Hindalco Industries, Merrill Lynch, Mar 2007
13. Luthra, Vandana Hindalco Industries, Merrill Lynch, Sep 2007
14. Luthra, Vandana, and Bhaskar Basu, Hindalco Industries, Merrill Lynch, Feb 2009
15. Mahtani, Pradeep and Raashi Chopra, Hindalco Industries, Citigroup Global Markets
Equity Research, March 2007
16. Mehta, Chintan, Hindalco Industries Ltd, Asit C Mehta Intermediates, Dec 31, 2007
17. Mishra, Vishal, and Sameer Dalal, Hindalco Industries, Il&FS Investsmart, May 2007
18. Sachdev, Sunita, Hindalco Industries, UBS, Nov 2007
19. Shah, Chirag, Hindalco Industries, SSKI, May 2007
20. Shah, Chirag and Ritesh Shah, Hindalco Industries, IDFC SSKI, Nov 2007

21. Surojit Chatterjee, "Birla's Hindalco Buys Aluminum Giant Novelis for US $6.4
billion," International Business Times, Feb 13, 2007

Endnotes

Hindalco Press Release, May 15, 2007

http://www.hindalco.com/media/press_releases/200705may/novelis_subsidiary_hindalco.htm accessed on July 1,
2009
ii

Hindalco Press Release, 16th May 2007

http://www.hindalco.com/media/press_releases/200705may/novelis_subsidiary_hindalco.htm accessed on July 1,
2009
iii

www.novelis.com http://www.novelis.com/Internet/en-US/AboutUs/ accessed on July 1, 2009

iv

www.hindalco.com http://www.hindalco.com/about_us/overview.htm accessed on July 1, 2009

Hindalco Press Release, 11 February 2007.

http://www.hindalco.com/media/press_releases/200702feb/hindalco_and_novelis.htm accessed on July 1, 2009
vi

Hindalco Press Release, February 11, 2007

http://www.hindalco.com/media/press_releases/200702feb/hindalco_and_novelis.htm
vii

Hindalco Press Release, February 11, 2007

http://www.hindalco.com/media/press_releases/200702feb/hindalco_and_novelis.htm
viii

Hindalco Press Release, February 11, 2007

http://www.hindalco.com/media/press_releases/200702feb/hindalco_and_novelis.htm
ix

Hindalco Press release, May 16, 2007

http://www.hindalco.com/media/press_releases/200702feb/hindalco_and_novelis.htm
x

The Ringsider Metal 2007, The London Metal Exchange