Hindalco-Novelis: a suitable bonding
The acquisition to unleash synergies that benefit both
The acquisition of Novelis by Hindalco, bodes well for both the entities. Novelis, processes primary aluminium to sell downstream high value added products. This is exactly what Hindalco manufactures. This makes the marriage a perfect fit.
Currently Hindalco, an integrated player, focuses largely on manufacturing alumina and primary aluminium. It has downstream rolling, extruding and foil making capacities as well, but they are far from global scale. Novelis processes around 3 million tonnes of aluminium a year and has sales centres all over the world. In fact, it commands a 19% global market share in the flat rolled products segment, making it a leader.
Incidentally both the companies are known for their cost consciousness. Hindalco, by virtue of access to bauxite mines and having captive power generating facilities, is amongst the bottom quintile of the global cost curve. It’s operating cost of around $1,100 a tone is easily amongst the lowest. Same is the case with Novelis. “The company is extremely productive to the extent of being miserly,” said Debu Bhattacharya, managing director, Hindalco, when asked about how the cultural fit would work. The gain for Hindalco will emanate from the fact that the company gets access to global markets in one direct shot. Analysts reckon this will give the company two direct advantages.
One is that it will be able to capture the total value chain in the aluminium business. Novelis is a preferred supplier to the best known companies like Coca Cola, Ford and General Motors. Around 36% of its revenues came from the can business, which requires highly specialised sheets.
The fact that most of Novelis’s facilities are in close proximity to its target market helps the company reduce freight costs. “Having finished products facilities close to the market place is an growing trend in the aluminium industry” adds Bhattacharya. For Hindalco’s investors the advantage is that revenues and share price, is expected to be less vulnerable to aluminium price fluctuations on the London Metal Exchange (LME). Hindalco share price currently has a strong correlation with aluminium prices and they directly track the LME metal price. This is because 83% of its EBITDA is sourced from the aluminium businesses.
With the acquisition of Novelis, this is expected to reduce as prices of value added products are not as volatile as that of the primary metal. Novelis stands to gain access to low cost aluminium from Hindalco.
Hindalco is also in the process of a massive expansion and its capacities are expected to touch 1.5 million tons by 2012 to become one of the world's five largest producers from its 13th-largest position now. The acquisition of Novelis will create a ready buyer for the extra metal manufactured by the AV Birla Group.
