Hindalco Industries registered consolidated revenue of Rs 1.16 lakh crore in FY18, almost the same as L&T and Tata Steel. However, company doesn’t have as much visibility as the other two, partially due to lower profitability of the business. Its net profit for the year was about Rs 6,000 crore against as high as Rs 18,000 crore for Tata Steel and Rs 7,400 for L&T. Still, the company has a strong business model and offers significant strategic insights. Here is a look at its businesses, strategy and financials.Hindalco Industries is a part of Aditya Birla Group, among the oldest business groups in the country. The group recorded revenue of Rs 3 lakh crore and operating profit of about Rs 28,000 crore in FY18. The group has managed marked diversification from old economy sectors to newer sectors such as financial services, Telecom etc. The group was chosen as ‘Best Employers 2018’ by a global consulting firm, which speaks for the group apart from its financials.

Hindalco is among the older business of the group present in Aluminum and Copper manufacturing sector. Its products find application in industries such as automobiles, power generation and transmission, industrial machinery, packaging etc. Company’s growth graph has some similarity with Tata Steel, both setting their footprints in the global market with a big ticket acquisition around the same time. For Hindalco, it was the acquisition of Canada based Novelis, which, like Corus for Tata, caused substantial financial stress to the group. However, Novelis has turned out quite impressively, reflected in the recently announced acquisition of another US based company.

Company’s business can be grouped into three parts, each having different dynamics – Domestic Aluminum, domestic Copper and global Aluminum (or Novelis). Domestic business is more profitable primarily due to access to captive mines for bauxite, the key raw material. The other key input, coal requirement is met through own mines and long term contract with CIL. While these two help improve the margin and reduce the impact of input price fluctuation, its share in value added product is low at about 35%. As a result, the company is not able to make the most of this advantage.

The second business group, Novelis, has strong value added products portfolio including about 20% from automobiles sector which fetches higher prices. However, the margins remain under check due to lack of backward integration. The impact of high input price is so strong that even though Novelis meets more than half of its input requirement from using recycled raw material, its raw material cost/sales ratio is almost 5% higher than the domestic business. Novelis, in fact, remained under severe financial stress due to the downturn in market when the prices of products fell sharply but input prices remained mostly firm. FY18 was actually a turnaround year for Novelis with net profit attaining its sustainable level of about Rs 3,800 crore against just about Rs 400 crore last year.

The third group, Copper, is also dependent upon the market for raw material and therefore, doesn’t have any real advantage. In fact, the dependency on international market exposes it to additional risk due to exchange rate and higher market volatility. However, the revenue of this is smaller than the other two groups and therefore, has less impact on aggregate financials. While Novelis accounts for nearly 60% of the revenue, its share is slightly lower at 50% in operating profits. Copper business has 20% share in revenue and 11% in operating profits.

The segmentation and their value to the aggregate business is captured in company’s Annual Report, “The company has de-risked its operations by supporting its high-margin, high-volatility aluminum business with two steady cash flow businesses – copper and Novelis”.

A look at the financials shows balance sheet of little less than Rs 1.5 lakh crore at the end of FY18. Of this, about Rs 64,000 crore is invested in Property, Plant & Equipment (PPE). This is still somewhat on the lower side for a pure manufacturing company, largely due to depreciated assets. More importantly, its capital work-in-progress is less than Rs 2,000 crore which is indicative of a stable business model with limited growth opportunity. An impotent item on the assets side is Rs 18,000 crore as goodwill, attributable to its acquisition of Novelis. Goodwill arises when a company acquires another company at a value which is usually higher than the book value. This is in lieu of future profit that the acquired company would generate for the acquiring company. The books of account take into consideration only the actual value of the assets, the rest being shown as goodwill.

Company has a net worth of Rs 55,000 crore with debt equity ratio of 2.8:1. It has a negative working capital (trade payable – trade receivable) of over Rs 10,000 crore. This means it is getting money faster from its customers than it is giving to its suppliers. That is typical of a large company. This could roughly mean savings of nearly Rs 1,000 crore in company’s financing cost.

(Image courtesy of Company’s Annual report)

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