iassignment submitted in the elementary course of Accountancy by mr in PRM 30, IRMA

1. Institute of Rural Management, Anand
Financial Statement
Analysis of Hindalco
Submitted To: Dr. K. N. Badhani
Submitted By:
Archit Gupta(P30067)
Govind Rai(P30080)
Mahima Shrimali(P30082)
Nivedita Pandey ( P30089)
09

2. Acknowledgement
We would like to express our deepest gratitude to our instructor Dr. K. N. Badhani for
guiding us and helping us understand the fundamentals of Financial Accounting.
This project has given us the opportunity to analyze the practical aspects of Financial
Accounting and Management especially with respect to the Aluminum industry.

3. Synopsis
The assigned project was focused on the detailed financial analysis of HINDALCO
industries for the period of 2006-07 to 2007-08. The analysis was done using the
annual reports and the official financial statements released by the company. The
analysis contains following components:
a) Environment, Industry, and Company (EIC) Analysis
b) Industry Analysis using Porter’s Five forces
c) Financial Statement Analysis:
• Liquidity Ratios
• Profitability Ratios
• Solvency Ratios
• Efficiency Ratios
• Capital Market Ratios
• Du-Pont Analysis
• Trend Analysis

4. Environment Analysis
Global Environment: The extraordinary financial crisis in the US has spread
to Europe and Japan and is likely to see most developed economies suffering a
prolonged period of recession that could extend beyond 2009 and according to
some even beyond 2010. The financial crisis in the US started in the latter half
of 2007, with the so-called sub-prime housing mortgage crisis. As is by now
well established, the crisis had its real roots in hugely excessive leveraging by
investment and commercial banks, under-pricing of risk and lack of necessary
regulatory oversight. The busting of some of the big financial institutions has
created an atmosphere of lack of confidence. This in turn has near completely
clogged the flow of credit in the system. The banker’s adage that ‘it’s not the
speed that kills, it’s the sudden stop’ fits the present precarious situation quite
well. The impasse seen in the credit flow has had a direct impact on investment
and consumption and has taken a massive toll of the real economy. The
morphing of the ‘Wall Street crisis’ in to a historical ‘Main Street crisis’ has
led to the majority of OECD economies sliding into deep recession. And it is
not yet clear as to when the bottom of this recessionary slide will be reached.
This causes a further loss of confidence.
The enormity of the situation can be sensed by looking at some numbers. The
IMF has re-estimated that the losses for financial institutions on account of
US-based mortgage loans (the so called sub-prime loans) and securities may
raise up to US$ 2.2 trillion (last estimate in October 2008 was US $ 1.4
trillion). The total funds made available by the US government and the Federal
Reserve so far under the various rescue programs have already amounted to a
whopping US$ 7.5 trillion or more. In addition, the loss of market
capitalization can be gauged from the sharp fall in stock market prices both in
mature and emerging economies. The loss of wealth this represents is bound to
adversely impact global demand for a prolonged period. This year in the
Forbes list of billionaires the total wealth registered was 2.4 trillion U.S.
dollars, down from 4.4 trillion last year, reducing more than 45 per cent and
marking the worst reading since Forbes began compiling the list.

5. This acute financial crisis resulted in a sharp slowdown of global GDP growth
rate (Refer Figure above). The acuteness, unpredictability and speed of the
economic downturn can be gauged by the frequent downgrading of forecasts
by the IMF. An IMF assessment in early November 2008 has projected that the
world output would grow by 2.2 per cent in 2009 as compared to 3.4 per cent
in 2008 and 5.2 per cent in 2007. This has been revised in January 2009 to as
low as 0.5 per cent and there is talk of the global GDP actually contracting in
2009 if major emerging economies are unable to compensate for the massive
loss of external demand. Projections by the IMF in November 2008 for
advanced economies had estimated a contraction of around 0.3 per cent in
2009. This has been revised downwards in January 2009 to around 2.0 per
cent. This is the first annual contraction for developed economies taken
together since World War II. The World Bank had projected in early
December 2008 that world trade will contract by 2.1 per cent in 2009, the first
time since 1982. The IMF in January 2009 has revised it downwards to 2.8 per
cent. The decline in exports in some major economies in the third and fourth
quarters of 2008 has been simply stunning. In January 2009, exports fell
sharply in Japan by 46.3 per cent, in Germany by 20.7 per cent, China by 17.5
per cent, in India by 15.9 per cent and in UK by 6.7 per cent.

6. While some major emerging economies like China and India escaped the
negative impact of the financial meltdown on their banking sector, any hopes
that their real economies have decoupled from the developed market economies
have been quickly belied. These economies are now experiencing a sharp
downturn in their GDP growth rates. The IMF in January 2009 lowered its
projections of GDP growth in 2009 for both India and China to 5.1 and 6.7 per
cent respectively. This is a sharp slowdown in GDP growth for both these giant
emerging economies compared to the past five years.
The contagion of this financial crisis has now spread to countries in Asia as the
export markets of these countries have virtually collapsed. Exports in major
Asian economies have declined by huge amounts. Japan and Taiwan saw a fall
in exports of around 35 per cent and 40 per cent respectively in their exports in
December 2008. The fallout from a major slowdown in Chinese exports and its
GDP growth on South East economies and indeed the rest of the world can be
severe and has yet to be factored in to the estimates of global growth for 2009
and 2010. Along with exports, industries in the region have also been affected
as can be seen in the shocking contraction of Taiwan’s industrial production of
around 32 per cent in December 2008. The severity of the economic downturn
has shocked all observers and the end is not yet in sight. The latest forecast by
Nouriel Roubini, the NYU professor, who had warned of the crisis ahead of all

7. others, is that world GDP will start to recover only toward the end of 2010.
Thus, we have to reckon with another one and half years of weak global
economic activity and perhaps a further shrinking of world trade. The scale of
this global financial crisis and the subsequent economic downturn across the
world has made it one of the truly global crises that the world has ever seen.
But the pattern and the characteristics of the crisis expectedly have some
precedence. In a study on the scale and duration of financial crises, Reinhart
and Rogoff (2008) found that financial crises are protracted episodes and the
asset market collapses due to them are deep and prolonged. Many of the
financial crises have been seen to be preceded by bubbles in the housing
market and huge bullish rally in the stock markets. In their study they found
that on an average real housing prices declined by 35 per cent over six years
and the stock prices collapses average around 55 per cent recovering back to
normal in more than three years. Apart from the impact on asset classes they
found that the crises have huge impacts on the real economy as well. In terms
of unemployment they found that the average slump to be around 7 per cent
with recovery normally seen in four years. In regard to real GDP per capita
they found that the contraction on average is around 9 per cent with an average
two year recovery period. These results are important to note both for getting
some understanding of how the global economic downturn might unfold in the
coming months and also for understanding the impact of the crisis on the
future outlook for the Indian economy.

8. Country Outlook
Using an averaging process of past crises we try to see the impact of the
present global crisis on the nature, severity and duration of the economic
downturn in India. The past crises that have been considered are the three
major crises – 1991-92 balance of payment (BOP) crisis; 1997-98 fallout from
the Asian financial crisis; and 2000-02 crisis caused by the worldwide bursting
of the dotcom bubble and 9/11 incident.
Quite expectedly, the sequencing of the crisis and the transmission mechanism
are different in developed and developing economies. In the developed world
the crisis originated in the financial sector and then impacted the real economy.
The Swedish and Norwegian crises of the nineties and the present crisis in the
US followed this sequence. For developing economies in the current crisis the
causality and sequencing generally runs the other way, with the real sector
being hit first and the financial sector thereafter. The pattern was of course
different in the Asian financial crisis of the later nineties when the crisis also
originated in the financial sectors of Asian economies. In line with this trend,
in each of the cases of external shock, the real sector of the Indian economy
has been initially impacted by the crisis as its banks are considered safe and

9. robust. Exports and foreign trade overall have been the first to be impacted and
act as the channel for the external crisis to be transmitted to the Indian
economy.
The chart below shows the average of annual exports growth rates during the
three major crises that India has suffered since the end of eighties. The period
selected is three years prior to and three years after the worst year of the crisis.
In the past crises we find that export growth slumped by 12 percentage points
during the crises period. But the export sector recovered in just one year after
the slump in all the three major crises. The sudden recovery of exports can be
due to the huge depreciation that is seen during the crises period.
On the other hand if we look at the imports we find that the slump is for a
longer duration. As can be seen from Fig. b, import growth starts falling two
years prior to the crises. The fall in import growth in the three major crises is
greater than the fall seen in export growth. Import growth fell at an average of
14 percentage points and recovery also takes longer than for exports. The sharp
depreciation during the crisis period makes the imports more expensive, hence,
leading to their prolonged slump. The recovery in the case of imports is longer
of a period of two years as compared to just one year in the case of exports.
During the present crisis, the growth in exports and imports has started
declining in September and October 2008 respectively.
In the earlier crises the manufacturing sector also was negatively impacted. For

10. example during the BOP crisis of 1991-92, the index of industrial production
(IIP) grew at just 0.6 per cent. Industrial production has also weakened during
the present downturn. IIP growth for the period, October to December 2008,
averaged 0.4 per cent. In the month of January 2009, IIP registered a negative
growth of around -0.5 per cent. As can be seen from the average of past crises,
IIP growth in the peak year of the crises has fallen by an average of 3
percentage points, year on year (Fig. a). In Indian banks did not have any
direct exposure to mortgage-based securities, their off- sheet activities were
quite limited and nothing of the sort of securitization that was seen in the US
was present here.
Finally, in the case GDP growth we find it falling by about 3 percentage points
during the peak crises year (Fig. b).
Indian Economy: Recent Developments
India had been growing robustly at an annual average rate of 8.8 per cent for
the past five years (2003-04 to 2007-08). This was higher than the potential
growth rate of output as estimated both by the IMF and OECD. The strong
Indian growth story, based on its structural strengths of a young population,
skilled manpower, rising savings and investment rates, large unfulfilled
domestic demand and globally competitive firms attracted significant investor
attention in recent years. Analysts have predicted that by the year 2025, India
would be the third largest economy in the world after China and the US.
Recent high rates of economic growth have been the result of high levels of

11. investment, rise in productivity supported by technological up-gradation and
greater integration with global flows of trade, finance and technology. Fears of
over-heating of the economy prompted the Reserve Bank of India (RBI) to
begin monetary tightening as early as September 2004 when the cash-reserve
ratio (CRR) for commercial banks was raised. The sharp increase in global fuel
and food prices in the first quarter of 2008 aggravated inflationary concerns
and resulted in further monetary tightening that saw interest rates being hiked
until August 2008. This was clearly a case of policy running behind the curve
and consequently over-compensating in its attempt to weaken inflationary
expectations. Expectedly, this amount of monetary contraction resulted in a
slowing down of the economy with the GDP growth coming down to 7.8 per
cent during April-September 2008 from 9.3 per cent in the same period of
2007.
The global financial sector meltdown precipitated by the collapse of Lehman
Brothers in September 2008 and the subsequent virtual nationalization of AIG,
the world largest insurance company, impacted India at a time when the
economy was already in the midst of a cyclical slowdown. The immediate
transmission of the financial crisis to India was through a cessation of credit
flows which was reflected in the spiking of overnight call money rates that
rose to nearly 20 per cent in October and early November 2008. Spooked by
market rumors and some circumstantial evidence, depositors sought safety by
shifting their deposits away from private banks to large public sector banks as
reflected in the State Bank of India (SBI) seeing an increase in deposits of
more than Rs. 1000 Crore per day during that period. Foreign institutional
investors (FIIs) withdrew from the Indian markets to provide the much-needed
liquidity to their parents in the US or Europe. This resulted in a net repatriation
of about $ 13 billion by the FIIs in 2008 on account of equity disinvestment
though small has resulted in a sharp decline in equity prices and market
capitalization. Besides, there had been large-scale redemption of holdings with
mutual funds which put further pressure on liquidity. Thus, while the Indian
banking sector remained largely unscathed by the global financial crisis, it

12. could not escape a liquidity crisis and a credit crunch. This in turn has had its
impact on investment and consumption and the real economy.
Thus, the present global crisis has already begun affecting the Indian economy.
With the sharp fall in oil and other commodity prices, inflation fears have
receded. The year- on-year inflation rate has already come down to 2.4 per
cent in the week ended 28th February 2009 from the peak of 12.9 per cent for
the week ended 2nd August 2008. The GDP growth rate for 2009 is expected to
be between 5.6 -6.9 %.

13. Policy trends
Global Integration
Indian economy has become much more integrated with the world economy
now than the pre-reform period. Liberalization in industry, investment, foreign
trade, financial sector and capital flows that was undertaken after the balance
of payment crisis in early 1990s led to India becoming well integrated with the
world economy. Total trade flows (receipts and payments on merchandise and
invisibles), as a proportion of GDP, rose from 20 per cent to 53 per cent during
the period 1990-91 to 2007-08. Capital flows (inflows plus outflows) had been
just 12 per cent of GDP in 1990-91, and in 2007-08 they rose to 64 per cent of
GDP.
With the increased linkage with the world economy, India cannot remain
immune to the global crisis. India began to feel the impact of the crisis in

14. January 2008 when the BSE sensex collapsed after crossing the peak of 20800
in early January 2008. Basically there are three channels through which India
is affected by the global crisis: (i) financial markets, (ii) trade and (iii)
exchange rate.
The financial channel has been operating in India largely through the equity or
portfolio flows. The outstanding FII equity investments at the end of December
2007 had been about US$ 66 billion and by 13th March 2009 they have fallen
to US$ 51 billion. This is due to the US and European financial institutions
which are undergoing a historically unprecedented “deleveraging” process.
The IMF has estimated that the US and the European banks alone are to
downsize their assets by about US$ 10 trillion in 2009. This will involve
massive disinvestment from the emerging markets continuing this year. FII
equity outflows are just one part of outflows from India. Indian banks and
corporates have been unable to borrow from abroad as there is a complete
freeze of the financial system in the US and Europe. Instead, they had to send
funds from India to provide for the necessary liquidity in their operations
abroad as foreign banks were unable to meet their requirements. Moreover,
trade financing by foreign banks also practically dried up and Indian banks had
to substitute for that as well. With the crashing of global and domestic stock
markets, the primary issue market also dried up in India. All this led to a huge
liquidity and credit squeeze in India during September-October 2008.
The trade channel has worked negatively with the collapse of global demand
for Indian exports, both merchandise and services. As a result, growth in
India’s exports slowed down sharply in September 2008 and turned negative
from October onwards. Merchandize exports have been growing at 29 per cent
till September 2008. Software exports grew by 22 per cent in H1 2008-09 and
remittances by 49 per cent. They are likely to experience sharp declines in the
second half for which data is not yet available. A 10 per cent decline in the
growth of export of goods and services could bring down the GDP growth
significantly.

15. The rupee has been depreciating since January 2008 as a direct result of the
huge reverse flow of capital out of India. From an average Rs. 40.36 per US
dollar in March 2008 it fell to an average of Rs. 49.00 in November 2008,
depreciation of about 18 per cent and further to nearly Rs 52 at the beginning
of March 2009. This is a decline of 22 per cent over the same month in 2008.
Depreciation is good for Indian exports but it will have adverse effects on
corporates who borrowed abroad and will raise the cost of external debt
servicing. Outstanding commercial borrowing at end-March 2008 had been
US$ 62 billion.
On the capital account, there could be a nominal surplus of less than 1 per
cent of GDP as compared to huge surpluses in earlier years. Foreign reserves
will be drawn down to the extent of US$ 16 billion (including valuation
changes) against an accretion of US$ 92 billion last year. This will imply a
change of more than $100 billion or nearly 10% of GDP in the BOP comfort
level of the economy. This may have an adverse impact on investor
perception and also on our own ability to handle a further weakening of our
service and merchandize exports. There is thus an urgent need for focusing on
measures to push exports.
Investment Environment:
Despite India’s foreign investment policy allowing 100% FDI in most sectors,
India has thus far failed to reach its full potential as a destination for FDI. The
government’s attempts at increasing FDI inflows have been hampered by the
several impediments including pervasive corruption, an unwieldy
bureaucracy, and a significant deficit in critical infrastructure. India is known
for diverse operating environments with regulations varying from state to
state.
Significant reform in investment-related matters, particularly regarding
foreign investment, was delayed over the past few years largely due to the
UPA’s reliance on India’s communist parties for support in parliament. The

16. ending of this support in 2008 enabled limited reforms to be passed. For
example, in February, the government initiated changes that further opened-
up certain sectors such as insurance, telecom and retail, to FDI. The
government’s move didn’t alter the FDI caps in place in these sectors but
instead permitted foreign equity investments beyond the limit to occur
indirectly.
One expectation is that the re-elected UPA government, that no longer relies
on India’s main leftist parties for support, will now be in a position to push
through further economic and investment reforms, many of which will
provide opportunities for foreign investors. The reform agenda is likely to be
moved forward but probably at a gradual pace, particularly given the present
state of the global economy as well as the diversity of views on these issues,
even within the Congress party itself.
Policy Response to the Economic Slowdown
Monetary Policy Measures
Before the spread of the global crisis, rising inflation was one major downside
risk for the Indian economy. But the fall of prices of oil and other commodities
and overall fall in demand as a result of recession in major developed countries
has pushed down the rate of inflation in India. Inflation measured by the
wholesale price index (WPI) had peaked at 12.9 per cent in early August 2008
and has been coming down since then. WPI inflation dropped to 4.4 per cent
by 31st January 2009 and just 2.4 per cent as on 28th February 2009. Monetary
policy shifted gear and became expansionary from October after the scale of
the US financial sector meltdown and its likely adverse effects on the Indian
economy became evident. The policy focus has shifted from containing
inflation to promoting growth. The RBI thus acted with considerable alacrity
in infusing considerable liquidity in to the system.
Falling inflation, a positive byproduct of global crisis, enabled the central bank
to loosen monetary policy more aggressively. As indicated earlier, the RBI

17. lowered the cash reserve ratio (CRR) requirements of banks from 9 per cent to
5 per cent, statutory reserve ratio (SLR) requirements from 25 per cent to 24
per cent and the repo rate (the rate at which it lends to banks overnight), from
9 per cent to 5 per cent and reverse repo rate (the rate at which RBI borrows
from banks) from 6 per cent to 3.5 per cent. It also opened a special window
for banks for short-term funds for on-lending to mutual funds, NBFC’s and
housing finance companies. It has also started the buy-back of the market
stabilization scheme (MSS) securities from mid-November. RBI has opened a
refinance facility to Small Industrial Development Bank of India (SIDBI),
National Housing Bank (NHB) and EXIM Bank and a liquidity facility to
NBFCs through a SPV. It also has opened a dollar swap arrangement for banks
for their overseas operations. The actual or potential liquidity injection under
all these measures has been estimated at Rs. 3, 88,045 Crore equivalent to over
7 per cent of GDP.
This is indeed an impressive slew of monetary policy measures and shows that
the RBI is both watchful and active. The present problem is that this additional
liquidity seems to have either found its way into a build-up of bank deposits or
been preempted by government borrowing. There is hardly any evidence that it
has been used for boosting either investment or consumption demand.
The liquidity crisis and credit crunch felt in the economy from mid-September
to October 2008 has turned into a situation of deep demand contraction for
bank finance as the effects of global recession has spread to India. In fact the
expansion of bank finance in January 2009 has been negative at Rs.11, 218
Crore as against an expansion of Rs. 70,396 Crore in the same month of 2008
(Fig. 18). In the last four months from November 2008 to February 2009,
expansion of bank finance to the commercial sector has been just Rs. 60,862
Crore as compared to Rs. 2, 36,227 Crore in the same period last year. This
reflects a very soft investment sentiment in the economy which may persist in
the coming months.

18. Fiscal Stimulus
Due to the acuteness of the financial crisis and the ineffectiveness of monetary
policy, governments across the world have announced various fiscal stimulus
packages to counter the crisis. In terms of GDP, South African government has
announced the biggest stimulus package that constitutes around 24 per cent of
GDP .The second biggest stimulus package has been announced by the
Chinese government which constitutes 16.3 per cent of GDP with a total
amount of around US$ 586 billion. In absolute terms, the US fiscal stimulus is
the largest with an amount of US$ 787 billion. However, these fiscal numbers
do not provide the real estimate of total stimulus as guarantees are not included
in these calculations or automatic stabilizers provided in certain countries. The
Indian government’s fiscal package is small in magnitude constituting around
1.3 per cent of GDP for 2008-09. This seems to be quite small as compared to
most of the countries. But as has been reiterated earlier there is less fiscal
headroom in India which is already running a high public debt.
The Indian economy was on a cyclical slowdown after a five-year record boom
and there was every hope that the economy will go for another strong growth
phase after this brief slowdown. The global crisis has changed that outlook and
instead will deepen and prolong Indian economy’s slowdown. It has dealt a

19. severe blow to investment sentiments and consumer confidence in the
economy. The policy response so far has been prompt in the form of monetary
easing and fiscal expansion but the impact may not be much in the near term.
A major worry is the severe weakening of India’s fiscal position and balance
of payments during this crisis period. The basic question is how long it will
take to revive the investment and consumer demand which are falling
precipitously.
The real challenge for Indian policy makers and India Inc is however to try and
raise the share of India’s exports in major markets and product segments. It is
really ironical that India’s share in world trade is lower than the level as in
1950!! This is not tenable any longer if we have to achieve rapid growth with
equity. Exports have the desirable characteristic of being relatively labor
intensive. This is especially true of services exports that include a wide range
of exports such as software, tourist earnings, films, accountancy, legal services
etc. On the other hand, there is hardly reason for our textile and garment
exports to lose grounds, as they have been doing, to Bangladesh, Vietnam and
other such smaller economies when we still have such a large pool of
unemployed human resources. For pushing both services and labor intensive
manufactured exports, the policy makers must pay much greater attention to
labor market reforms on the one hand and to development of vocational skills
on the other. Overall, it is important to emphasize that while fiscal and
monetary stimuli may provide the much needed short term palliatives for
shoring up the GDP growth, the real push will only come from implementing
structural reforms, the agenda for which has really been put on the shelf for a
while. We cannot hope to generate the needed economic activity or the
employment levels by continuing to tinker around with the economy. Bold and
visionary measures, such as those undertaken in the early nineties, are needed
again if the economy is not to slip into a prolonged phase of anemic growth.

20. Aluminum Industry in India
Aluminum Industry in India is one of the leading industries in the Indian
economy. The main operations of the of the India aluminum industry is mining
of ores, refining of the ore, casting, alloying, sheet, and rolling into foils. At
present, Hindalco and Nalco are one of the most economical in the production
of aluminum in the world.
Aluminum industry, which is highly capital intensive and scale sensitive,
depends on two major variable cost components viz. alumina and power.
Bauxite from which alumina is obtained, being a bulk commodity, has forced
companies to be concentrated near bauxite deposits.
With over 7% growth per annum, one of the highest in the world, the Indian
aluminum market is booming. Even better, sectors that extensively use
aluminum are themselves booming, ensuring that this sector stays firmly on
the growth path for times to come. Fortunately for India, it is perched atop the
5th largest Bauxite reserves in the world with one of the world's lowest per
capita consumption rates that is set to explode. Together, these factors spell
one clear outcome: that if you're a player in the global aluminum sector, India
is where the action and the future of your business lie.
The India aluminum Metal Industries sector in the previous decade
experienced substantial success among the other industries. The India
aluminum industry is developing fast and the advancement in its technologies
is boosting the growth even faster. The utilization of both international and
domestic resources was significant in the rapid development of the India
aluminum industry. This rapid development has made the India aluminum
industry prominent among the investors. The India aluminum industry has a
bright future as it can become one of the largest players in the global aluminum
market as in India the consumption is fairly low, the industry may use the
surplus production to cater the international need for aluminum which is used
all over the world for several applications such as aircraft manufacturing,

21. automobile manufacturing, utensils, etc.
The Indian aluminum sector is characterized by large integrated players like
Hindalco and National Aluminum Company (Nalco). The other producers of
primary aluminum include Indian Aluminum (Indal), now merged with
Hindalco, Bharat Aluminum (Balco) and Madras Aluminum (Malco) the
erstwhile PSUs, which have been acquired by Sterlite Industries.
Consequently, there are only three main primary metal producers in the sector.
Some Key points regarding this sector:
• The per capita consumption of aluminum in India continues to remain
abysmally low at under 1 kg as against nearly 25 to 30 kgs in the US
and Europe, 15 kgs in Japan, 10 kgs in Taiwan and 3 kgs in China. The
key consumer industries in India are power, transportation, consumer
durables, packaging and construction. Of this, power is the biggest
consumer (about 44% of total) followed by infrastructure (17%) and
transportation (about 10% to 12%). However, internationally, the
pattern of consumption is in favor of transportation, primarily due to
large-scale aluminum consumption by the aviation space.
• In order to protect the domestic industry, the government has imposed
up to 30% safeguard duty on import of aluminum products from China.
Imports of aluminum flat sheets used by sectors like auto and
construction are imposed a duty of 12% to 14% while import of
aluminum foils, mainly used by the packaging industry attracts around
25% to 30% duty. This duty is imposed for a period of two years
starting March 2009.
Aluminum: Through the lens of Michael Porter
Backed by abundant and good quality bauxite reserves and cheap labor costs, Indian
aluminum producers have emerged among the lowest cost aluminum producer in the
world. India is home to the sixth largest bauxite deposit in the world which makes its

22. world’s 5th largest aluminum producer. Aluminum industry in India registered a
phenomenal growth during the past few years on the back of robust growth in the
economy. However, the current ongoing global crisis seems to have created some
medium term hiccups. We have analyzed the domestic aluminum industry through
Michael Porter’s five forces model so as to understand the competitiveness of the
sector.
Barriers to entry: We believe that the barriers to entry are medium. Following are
the factors that vindicate our view.
1. Economies of scale: As far as the sector forces go, scale of operation does
matter. Benefits of economies of scale are derived in the form of lower costs
and better bargaining power while sourcing raw materials. It may be noted that
the minimum economic size of a fully integrated Greenfield smelter is around
250,000 tonnes. The aluminum companies, which are integrated, have their
own mines for key raw materials such as bauxite and coal and this protects
them from the potential threat for new entrants to a significant extent. They
also have their own power plants as it is a major cost driver.
2. Capital intensive: Aluminum industry is a highly capital intensive business. It
is estimated that a capital investment of around US$ 1.2 bn is required to setup
an economically viable Greenfield project.
3. Higher gestation period: The gestation period for an economically viable
green field plant is over 4 years while for a Brownfield project,
(modernization / capacity addition) the gestation period is relatively lower
between 1.5 years to 2 years.
4. Government policies: The government has a favorable policy towards
aluminum manufacturers. In fact to protect the domestic industry, recently, the
government has imposed duty on value added products like foils and rolled
products from the Chinese markets. However, similar to other sectors, there
are certain discrepancies involved in allocation of mines and land acquisitions.

23. Furthermore, regulatory clearances and other issues are some of the major
problems for the new entrants.
Bargaining power of suppliers: The bargaining power of suppliers is low for fully
integrated aluminum smelters (upstream) as they have their own mines for key raw
material like bauxite. Examples here could be Nalco and Hindalco. However, those
who are non-integrated or semi integrated, (downstream) have to depend upon the
upstream producers for alumina or primary metal. While the bargaining power is
limited in case of power purchase as it is highly regulated sector and government is
the sole supplier most of the times, increasing usage of captive power plants are
helping the companies to rationalize their costs to certain extent.
Bargaining Power of Customers: Being a commodity, customers enjoy relatively
high bargaining power as prices are determined on demand and supply.
Competition: Competition is primarily on quality and price, as being a commodity,
differentiation is difficult. However, the recent spate of consolidation has reduced the
competitive pressure in the industry. Further, increasing value addition to aluminum
products has helped some companies protect themselves from the high volatility
witnessed in the industry.
Threat of substitutes: On one side, the usage of aluminum is rising continuously in
the automobile and construction sector but steel still remains a main substitute
because of its relatively lower cost. On the other side, copper has been slowly
substituting aluminum’s usage in the power sector due to its higher conductivity.
However, with properties like higher strength-to-weight ratio, durability, higher
corrosion-resistance and relatively lower cost, aluminum is able to hold its own. Thus
the usage of aluminum is likely to increase over a long term period.

24. Global Aluminum Industry
Global production of primary aluminum rose continuously from 32 million tonnes
(MT) in 2005 to 38 MT in 2007, registering a CAGR of 9%. However, during 2008
the production remained flattish at around 38 MT (2007 levels) on account of
significant fall in demand in the second half of the year due to the global credit crisis.
This created a large amount of demand supply gap, thus making the inventory levels
at LME reach their multi year highs. China accounted for around 30% of the total
global aluminum production. Asia, once again showed the largest annual increase in
consumption of primary aluminum, driven largely by increased industrial
consumption in China, which has emerged as the largest aluminum consuming nation,
accounting for 35% of global primary aluminum consumption in 2008. As far as the
global consumption goes, it declined by around 3%YoY to 37 MT in 2008.
The Indian aluminum industry registered a growth of around 9% in FY09. Strong
growth in industrial, infrastructure, automobile, transportation and power sectors
during the first half of the fiscal were the key drivers for the demand. However,
realizations for the fiscal fell significantly on account of fall in LME prices due to the
global credit crisis, thus causing a dent in margins. On the other hand, the steep
depreciation of Indian rupee against the US dollar impacted the industry positively.
The total aluminum production in the country stood at around 1.35 m tonnes in FY09.
Prospects
Overseas Demand Boosting Metal Prices - Demand in emerging markets like China
and India, coupled with drastically reduced inventories and lower output, have
boosted US metal prices. US Steel raised its prices three times between June and July
2009, while Alcoa boosted aluminum prices by 6 percent since the first quarter,
according to BusinessWeek.com. Industry observers differ over whether prices will
continue to rise, however. Some say US auto production is too weak to sustain higher
prices, while Chinese consumption may slow. Output has furthermore stagnated
despite higher prices, leaving metal makers still in search of profits.

25. Climate Bill Could Impact Steel Costs - A Congressional climate-change bill could
add $1 billion to production costs for US steel producers by 2030. The Waxman-
Markey bill calls for the reduction of carbon emissions by 17 percent by 2020 and
more than 80 percent by 2050. The domestic steel industry accounts for about 9
percent of heavy emissions in the US heavy industry sector. Steel earnings could drop
by 2 to 5 percent as a result of the legislation, and could fall further unless an offset
penalty is imposed on imported steel, according to a recent Goldman Sachs report.
Steel Imports Drop - US steel imports in June 2009 dropped to their lowest levels
since 1975, according to the American Iron and Steel Institute. Steel import permit
applications declined 23 percent compared to May, with Japan, India, South Korea,
and China submitting the largest finished steel applications. Despite the falling
applications, some industry observers are still concerned over unfairly traded imports:
steel imports boast a 28 percent market share, while domestic production has slowed
to 49 percent of capability.
• Globally, the demand for aluminum is projected to fall by around 7% in 2009 on
account of subdued conditions in the key user industries. However, China is projected
to maintain the consumption levels of 2008 mainly due to the fiscal stimulus package
that is likely to support its ailing economic growth. The revival in the demand for the
metal is expected to start from 2010 globally. As per Alcoa, world’s largest aluminum
producer, the demand for aluminum is projected to grow at around 6% CAGR till
2018 on account of newer packaging applications and increased usage in automobiles,
consumer durables, construction and defense.
• With key consuming industries forming part of the domestic core sector, the
aluminum industry is sensitive to fluctuations in performance of the economy. Power,
infrastructure and transportation account for almost 3/4th of domestic aluminum
consumption. With the government focusing towards bringing back GDP growth rates
of above 8%, the key consuming industries are likely to lead the way, which could
positively impact aluminum consumption. Domestic demand growth is likely to
remain robust over a long term period.

26. HINDALC
CO
Hin
ndalco's businesses
Hin
ndalco in I
India enjoy a leader
ys rship posit
tion in alu
uminum and copper. The
com
mpany's alu
uminum un
nits across the country encomp
pass the en
ntire gamu of
ut
oper
rations from bauxite m
m mining, alum
mina refinin aluminum smelting to downstr
ng, m ream
rolli
ing, extrusio foils an alloy wh
ons, nd heels, along with captiv
ve
Pow plants and coal m
wer mines. The Birla Cop
pper unit p
produces co
opper catho
odes,
cont
tinuous cas copper ro along w other by
st ods with y-products, including g
gold, silver and
r
DAP fertilizers
s.
Brie history
ef
The Hindalco story unfo
e olds with th establish
he hment of th compan in 1958, the
he ny ,
com
mmissioning of the alu
g uminum fa
acility at Re
enukoot in 1962 and the Renus
sagar
Pow Plant in 1967. Ove the years Hindalco has grown into the la
wer n er s, n argest vertic
cally
inte
egrated alum mpany in the countr and am
minum com ry mong the l
largest prim
mary
prod
ducers of al
luminum in Asia. Its co
n opper smelt is today the world’s largest cus
ter s stom
sme
elter at a si
ingle locatio Hindalc
on. co’s journey has been challengin at times, but
y n ng ,
truly exhilaratin
y ng.
200
07
:: In May 200 Novelis became a Hindalco su
n 07, ubsidiary w the com
with mpletion of the
f
acquisition p
a process. Th transactio makes Hindalco the world's lar
he on H e rgest aluminum
ro
olling comp
pany and on of the big
ne ggest produ
ucers of prim
mary alumin
num in Asia, as
well
w as being India's lea
g ading coppe producer.
er
:: A
Acquisition of Alcan's 45 per ce equity stake in th Utkal Alumina pro
s ent he oject,
th
hereby mak
king Hindalc the 100 p cent pro
co per oject owner.

27. 2006
:: Joint Venture with Almex USA for manufacture of high strength aluminum alloys
for applications in aerospace, sporting goods and surface transport
industries.
:: Signed a MoU with the government of Madhya Pradesh for a Greenfield
aluminum smelter in the Siddhi district of the state.
:: Hindalco completes largest Rights Issues in the history of Indian capital markets
with total size of Rs. 22,266 million.
:: Hindalco announces 10:1 stock split. Each shares with face value of Rs. 10 split
into 10 shares of Re 1 each.
:: In May 2006, the company entered into a JV with Essar Power (M.P.) Ltd. to
develop and operate coal mines at Mahan, Madhya Pradesh. The JV will supply
coal to the proposed aluminum smelter and power complex in Madhya Pradesh.
:: In May 2006, company's copper mining subsidiary Aditya Birla Minerals Limited
(formerly Birla Mineral Resources Pty Ltd.) came out with an equity offering and
subsequent listing on the Australian Stock Exchange (ASX).
:: In March 2006, the company acquired an aluminum rolling mill and wire rods
facility situated at Mouda (Nagpur), from Asset Reconstruction Company (India)
Ltd (ARCIL), belonging to Pennar Aluminum Company Ltd.
2005
:: All businesses of Indal, except for the Kollur Foil Plant in Andhra Pradesh,
merged with Hindalco Industries Limited.
:: In September 2005, the company split its shares in ratio of 10:1 in order to
enhance liquidity and to encourage participation from retail investors.
:: Aditya Birla Group to set up a world-class aluminum project in Orissa at a project
cost of about Rs.11, 000 Crore.
:: MoUs signed with state governments of Orissa and Jharkhand for setting up

28. Greenfield alumina refining, smelting and power plants.
:: Commissioned Copper III expansion, taking total capacity to 500,000 tpa.
2004
:: Scheme of arrangement announced to merge Indal with Hindalco.
:: Copper smelter expansion to 250,000 tpa.
2003
:: Hindalco acquires Nifty Copper Mine through Aditya Birla Minerals Ltd. (ABML,
formerly Birla Minerals Resources Pty. Ltd.).
:: ABML acquires the Mount Gordon copper mines in November 2003.
:: Hindalco becomes majority stakeholder in Utkal Alumina, a joint venture with
Alcan.
:: The amalgamation of Indo-Gulf's copper business with Hindalco becomes
effective from 12 February 2003.
:: Equity stake in Indal increased to 96.5 per cent through an Open Offer.
:: Divestment of 8.6 per cent holding in Indo Gulf Fertilizers Ltd.
:: Brownfield expansion of aluminum smelter at Renukoot to 345,000 tpa.
2002
:: Brownfield expansion at an outlay of Rs.1, 800 Crore — ninth potline
commissioned.
:: Buyback of equity shares to generate shareholder value and to utilize surplus cash.
:: Major corporate restructuring to create a non-ferrous metals powerhouse:
:: The amalgamation of Indo Gulf Corporation Ltd.'s copper business, Birla
Copper, with Hindalco with effect from 1 April 2002.
:: Open offer to acquire additional equity to make Indal a wholly-owned

29. subsidiary.
2001
:: Hindalco enters 'The Asia Top 25' list of the CFO Asia Annual Report Survey, the
only Indian company in 2001.
2000
:: Acquisition of controlling stake in Indian Aluminum Company, Limited (Indal)
with 74.6 per cent equity holding.
1999
:: Aluminum alloy wheels production commenced at Silvassa.
:: Brownfield expansion of metal capacity at Renukoot to 242,000 tpa.
1998
:: Foil plant at Silvassa goes on stream.
:: Hindalco attains ISO 14001 EMS certification.
1995
:: Mr. Kumar Mangalam Birla takes over as Chairman of Indal Board.
1994
:: A huge expansion, modernization and diversification program takes off.
1991
:: Beginning of major expansion program.
1967
:: Commissioning of Renusagar Power Plant — a strategic and farsighted move.

30. 1965
:: Downstream capacities commissioned (Rolling and Extrusion Mills at Renukoot).
1962
:: Commencement of production at Renukoot (Uttar Pradesh) with an initial capacity
of 20,000 mtpa of aluminum metal and 40,000 mtpa of alumina.
1958
:: Incorporation of Hindalco Industries Limited.

31. Recent accolades
Hindalco won the prestigious “D.L. Shah National Award for Economics of
:: Quality” given by Quality Council of India, presented by the President of India,
H.E. Dr. A.P.J. Abdul Kalam, on 9 February 2007.
National Energy Conservation Award-2006 was presented by the Ministry of
::
Power, Government of India.
Hindalco Hirakud Complex earned the Pollution Control Appreciation Award
::
presented by the Orissa State Pollution Control Board.
The IT department of Hindalco received prestigious IT certificates BS15000 (IT
services), ISO 9001 Software development) and BS7799 (Information
::
security). Hindalco's Renukoot IT function is the first in the Group as well as in
India to be recommended for all these certifications in an integrated manner.
The company's fabrication plant’s hot mill team won the prestigious Qualtech
::
Award for their project "Reduction of time in work role change time”.
Hindalco Taloja became the second unit after Renukoot to achieve the Integrated
:: Management System Certificate, which combines ISO 9001, ISO 14001, OHSAS
18001 into one Business Excellence Model.
Hindalco, Renukoot has won the National Award for Excellence in Water
::
Management 2006 organized by CII.
Hindalco Hirakud Power Plant team bagged second prize at the state level CII
::
Orissa Award 2006 for Best Practices in Environment, Safety & Health.
Hindalco Hirakud's Quality Circle 'Jagruti' bagged national level honours at the
:: 20th National Convention of Quality Circles, organized by the Quality Circle
Forum of India.
Hirakud Power Plant team received the State Safety Award 2006 for their act of
:: bravery in saving lives and preventing a disaster, by their proactive initiative to
arrest the chlorine leakage at the Railway Colony in Sambalpur.
Engineering Export Promotion Council (EEPC, Eastern Region) Award for
::
Export Excellence in recognition of highest performance in export of engineering

32. goods (Primary Metal, Rolled Products) for 2003-04.
"ICWAI National Award for Excellence in Cost Management-2005" presented by
::
the Institute of Cost and Works Accountants of India (ICWAI).
Renukoot Complex named the winner of the National Safety Award 2005 for the
:: second consecutive year. Also awarded the Greentech Safety Silver Award for its
outstanding safety performance during 2005-2006.
Hirakud Smelter received the State Safety Award for best performance in Safety,
Health & Environment Management-2004 as also the National Safety Award for
:: outstanding performance in industrial safety in achieving the longest accident free
period for the year — 2004 and Runners Up award for Lowest Accident
Frequency Rate — 2004 for the second consecutive year.
Hirakud also won the Shreshtha Surakhya Puraskar — 2004 and Prashansa Patra
— 2005 from the National Safety Council of India, Mumbai, for developing and
::
implementing effective occupational safety and health management systems and
procedures.
Hirakud Smelter also received the second prize for excellence in energy
::
conservation in aluminum sector for 2005 from the Ministry of Power, GoI.
The Muri Alumina Plant won the Greentech Safety Gold Award 2004-2005 and
:: Silver Award 2005-2006, as also the Greentech Environment Silver Award 2004-
2005.
The Kalwa Foil Plant was the recipient of the Dhanukar Rotating Trophy 2005-
::
2006 presented by the Indian Association of Occupational Health, Mumbai.
The Belur Sheet Plant was named the winner of the National Award for
Excellence in Water Management 2005 (Water Efficient Unit) and for Excellence
:: in Energy Management 2005 (Energy Efficient Unit), presented by the CII —
Sohrabji Godrej Green Business Centre. Belur also won the Greentech
Environment Excellence Gold Award 2005.
The Alupuram Extrusions plant earned the Best Safety Performance Award
::
presented by the National Safety Council, Kerala Chapter, while Alupuram

33. Smelter was presented the Industrial Safety (Runners Up) Award for 2003-2005
for the lowest average accident frequency.
Alupuram Extrusions earned the first prize in the Kerala state level Quality Circle
::
Competition organized by CII.
Alupuram Smelter ranked third in the Kerala state level Quality Circle
::
Competition organized by CII.
Bauxite and coal mines, in all regions (Jharkhand, Maharashtra, Chhattisgarh and
Orissa) have won a host of awards in safety, environment, pollution control and
overall performance during the Mines Safety Week and Mines, Environment &
:: Mineral Conservation Week programmes organized by the Indian Bureau of
Mines and the Directorate of Mines Safety.

34. Products and services
Hindalco Industries has a number of products to offer in categories like alumina
chemicals, aluminum foil and packaging, primary aluminum, aluminum alloy wheels,
aluminum extrusions, copper products, aluminum rolled products and DAP/NPK
complexes.
In alumina chemicals section Hindalco Industries produces alumina and hydrates. In
primary aluminum section its main offerings are ingots, billets and wire rods. In
aluminum extrusions section major products are rods, channels, flats, round tubes,
squares, rectangular tubes, equal leg angles and square tubes.
In aluminum rolled products section main offerings of Hindalco Industries are
building sheets, foil stock, cable wrap stock, hot rolled plates, circles, lampcap stock,
closure stock, litho stock, cold rolled coils, pattern sheets, cold rolled sheets, PCB
entry sheets and coils, finstock, spiral finstock and flooring sheets and tread plates.
There are other products in this section as well.
Aluminum …
Hindalco was among the first few alloy wheels companies to have obtained the
ISO/TS 16949 certification to meet the stringent standard of the automobile industry.
In India, Hindalco enjoys a leadership position in specialty alumina, primary
aluminum and downstream products. Apart from being a dominant player in the
domestic market, Hindalco's products are well accepted in international markets.
Exports account for more than 30 per cent of total sales.
Hindalco's major products include standard and specialty grade alumina and hydrates,
aluminum ingots, billets, wire rods, flat rolled products, extrusions, foil and alloy
wheels

35. Copper
Birla Copper, a unit of Hindalco is located at Dahej in Gujarat. The unit has the
unique distinction of being the largest copper smelter in the world at a single location
with 500,000 TPA capacity with multiple world class technologies. The facilities
comprise copper smelters, precious metals, fertilizers, sulfuric acid, captive power
plants, utilities and a captive jetty.
Hindalco's Birla Copper is a renowned producer of copper cathodes and continuous
cast copper rods since its inception, with ISO-9001:2000 (Quality Management
systems), ISO-14001:2004 (Environmental Management System) OHSAS-
18001:2007 (Occupational Health and Safety Management Systems) accreditations.
Mines
The two copper mines in Australia were acquired in
2003. Birla Nifty mine consists of an open-pit mine,
heap leach pads and a solvent extraction and
electrowinning (SXEW) processing plant, which
produces copper cathode. Birla Nifty's copper cathode
capacity is 25,000 TPA. Open pit mining was
completed in 2006. During FY2008, Nifty produced 5,112 tonnes of copper cathode.
A copper sulphide deposit is located at the lower levels of the Nifty open pit mine and
an underground mine and concentrator have been developed to mine and process ore
from this deposit. The Nifty Sulphide Operation, commenced ore production from
stoping in December 2005 and concentrate production in March 2006. During
FY2008, Nifty produced 53,397 tonnes of copper in concentrate.

36. Production capacities
Division Capacity and location
700,000 tpa (Renukoot)
Alumina 350,000 tpa (Belgaum)
180,000 tpa (Muri)
375,000 tpa (Renukoot)
Aluminum
143,000 tpa (Hirakud)
33,000tpa (Renukoot)
Extrusions
13,000 tpa (Alupuram)
100,000 tpa (Renukoot)
57,000 tpa (Belur)
Flat rolled products
50,000 tpa (Taloja)
30,000 tpa (Mouda)
Redraw rods 75,000 tpa (Renukoot)
30,000 tpa (Silvassa)
Foil and packing 6,000 tpa (Kalwa)
4,000 tpa (Kollur)
Wheels 300,000 pcs (Silvassa)
742 mw (Renusagar)
Captive power 78 mw (Renukoot)
368 mw (Hirakud)
Copper cathodes 500,000 tpa (Dahej)
Continuous cast copper rods 120,000 tpa (Dahej)
Sulphuric acid 1,470,000 tpa (Dahej)
Phosphoric acid 180,000 tpa (Dahej)
DAP and complexes 400,000 tpa (Dahej)
Gold 26 mt (Dahej)
Silver 200 mt (Dahej)
Power 135 mw (Dahej)

37. Mergers and Acquisitions
Hindalco Industries Ltd. and Novelis Inc. announce an agreement for Hindalco's
acquisition of Novelis for nearly US$ 6 billion
Aditya Birla Group's Hindalco Industries Limited, India's largest non-ferrous metals
company, and Novelis Inc. (NYSE: NVL) (TSX: NVL), the world's leading producer
of aluminum rolled products, announced that they have entered into a definitive
agreement for Hindalco to acquire Novelis in an all-cash transaction which values
Novelis at approximately US$6 billion, including approximately US $2.40 billion of
debt. Under the terms of the agreement, Novelis shareholders will receive US $44.93
in cash for each outstanding common share.
Based in Mumbai, India, Hindalco is a leader in Asia's aluminum and copper
industries, and is the flagship company of the Aditya Birla Group, a $12 billion
multinational conglomerate, with a market capitalization in excess of $20 billion.
Following the transaction Hindalco, with Novelis, will be the world's largest
aluminum rolling company, one of the biggest producers of primary aluminum in
Asia, and India's leading copper producer.
Mr. 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."
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

38. 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."
Novelis was 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 gave Hindalco immediate scale and a global footprint.
The transaction has been unanimously approved by the Boards of Directors of both
companies. The closing of the transaction is not conditional on Hindalco obtaining
financing.
The transaction will be completed by way of a plan of arrangement under applicable
Canadian law. It will require the approval of 66.66 per cent of the votes cast by
shareholders of Novelis Inc. at a special meeting to be called to consider the
arrangement followed by court approval. The closing of the transaction will also be
subject to customary conditions including regulatory approvals, and is expected to be
completed during the second quarter of 2007.
Novelis is the global leader in aluminum rolled products and aluminum can recycling.
The company operates in 11 countries, has approximately 12,500 employees and
reported $8.4 billion in 2005 revenue. Novelis has the unrivaled capability to provide
its customers with a regional supply of technologically sophisticated rolled aluminum
products throughout Asia, Europe, North America and South America. Through its
advanced production capabilities, the company supplies aluminum sheet and foil to
the automotive and transportation, beverage and food packaging, construction and
industrial, and printing markets.

39. Hindalco & Market in India
After functioning for over 3 decades in an era of the protective license raj, being
exposed to a market where competition exists at a global level would probably make
most India companies weak in the knees. But Hindalco Limited has lived through
both environments of protection and cutthroat competition and has emerged
unscathed.
Low cost production, incremental capacity additions, continuous modernization and
efficient asset utilization have been the underpinnings of Hindalco's strategy. The
company is vertically integrated right from the mining of bauxite till the production of
value-added products like extruded products, rolled products, rods and foils.
Aluminum has remained the sole focus of the company. The management of the
company has been responsive to the changes in the environment and has taken steps
accordingly to ensure efficient running of its business. Envisaging a power-deficit
scenario, Hindalco installed a 100 percent captive power unit as early as 1967. The

40. power plant (612 MW) has been run at peak load factors, and has today, made
Hindalco completely self sufficient in its power requirements. The net result is that
its efficiency norms are better than most of its peers.
This backward integration strategy of Hindalco has paid it rich dividends. The captive
sources for bauxite and power and proximity from coal mines to its power plant and
smelter give Hindalco an unmatched competitive advantage. In fact, it is rated
amongst the cheapest producers of aluminum in the world. Besides, being an
integrated producer, it has more flexibility in pricing as compared to its competitors in
the local market who convert from scrap or metal, especially in situations when prices
are rising. The company is seen, more often than not, as the leader in setting prices for
the domestic industry.
The fortunes of aluminum companies in India are dependent on several key factors
and Hindalco is no exception to any of these. With a fall in import duties on
aluminum, Indian companies today, no longer enjoy the protection available to other
sectors. Besides domestic competition, Indian aluminum companies also have to
compete with relatively cheaper imports. This makes the profitability of these
companies very vulnerable to changes in the international prices of aluminum and the
value of the Indian rupee. In recent times, aluminum companies in India have had a
mixed run. Though the prices of aluminum declined (leading to a squeeze in margins),
the value of the rupee also fell. This made aluminum cheaper to export from India,
and that much more expensive to import. With its fundamentals in place, Hindalco
has been able to face the challenges of weak demand and prices, both in international
and domestic markets.
In order to increase value addition, Hindalco has now added and modernized
downstream facilities (rolling, extrusion, foils). It is now focused on increasing its
downstream sales to improve margins and drive bottom-line growth. It is pricing its
products aggressively to penetrate the market. During the first quarter of the current
financial year, Hindalco's turnover growth of 14.5 percent was lead by an
improvement in sales mix. The company sold more of higher value rolled products
and foils. Thus while metal production increased by 5.6 percent and average prices

41. were up 3.5 percent, the product mix changes lead to a further 4.7 percent
improvement in turnover.
The recent run up in aluminum demand and prices have made analysts look up and
take notice. The stock has been a star performer at the bourses raking in impressive
gains of over 100 percent over just the past 6 months. But that is not the only reason.
The market has appreciated the recent shift in the perspective of the Birla Group,
which was recently spelt out by Chairman, Kumar Birla. It espouses a clear focus for
each group company, within its ambit of businesses, and efforts to unwind the
investments made by the companies in unrelated businesses. In line with its new
credo, Hindalco shelved its proposed Greenfield aluminum project and is instead
considering a Brownfield expansion. It also made a bid for Balco, an integrated
aluminum company, for which the government has announced a strategic sale of its
stake. With the overhang of a fresh plant now out of the way, industry observers are
seeing Hindalco in a new light. The new focus may also see Hindalco reduce in large
investments (Rs 4.8 bn in financial year 99) in group companies.

42. Financial Statement Analysis
Executive Summary
Hindalco Industries Ltd. Mar 2007 Mar 2008
Rs. Crore (Non-Annualised) 12 mths 12 mths
-
Total income 158.6441235 114.3565694
Sales 159.2368844 107.9950857
Income from financial services 140.8347913 248.2029493
Total expenses 149.2800309 110.1619313
Raw material expenses 166.1053982 113.35345
Power, fuel & water charges 101.5546717 103.417531
Compensation to employees 88.27000236 117.0690178
Indirect taxes 148.3553144 119.7206463
Selling & distribution expenses 117.7109206 106.7222178
PBDITA 154.2514181 111.2833795
PBDTA 154.7231904 103.6859647
PBT 166.4353897 102.9277675
PAT 154.8929359 117.9161004
Net worth 12418.04 17296.74
Paid up equity capital (net of forfeited capital) 104.33 122.65
Reserves & surplus 12313.71 17173.68
Total borrowings 7359.24 8467.7
Current liabilities & provisions 4036.9 3800.77
Total assets 25007.81 30963.47
Gross fixed assets 12539.47 13566.03
Net fixed assets 8483.14 8929.21
Investments 8804.78 14107.99
Current assets 7470.77 7748.62
Loans & advances 178.12 103.06
Growth (%)
Total income 58.64412353 9.049543747
Total expenses 49.28003094 6.807294494
PBDITA 54.25141808 7.314927533
PAT 54.89293588 11.56676403
Net worth 29.31806014 39.32276375
Total assets 32.25970232 23.81520013

43. Ratio Analysis
Profitability Ratios
Profitability Ratios are used to assess a business's ability to generate earnings as compared to its
expenses and other relevant costs incurred during a specific period of time
Return on Total Assets (ROTA): Ratio measuring the operating profitability of a firm,
expressed as a percentage of the operating assets. ROTA indicates a firm's ability to efficiently allocate
and manage its resources but (unlike 'return on equity') ignores the firm's liabilities. It is calculated by
ROTA = (Income before interest and tax / Total Assets)*100
2006-07 2007-08
EBIT 3800.9 4084.36
Total Assets 25007.81 30963.47
ROTA (%) 15.19 16.33
ROTA (%)
16.6
16.4
16.2
16
15.8
15.6
15.4 ROTA (%)
15.2
15
14.8
14.6
2006‐07 2007‐08
As can be observed the ROTA is increasing as the Total Assets is increasing thus we can see that
the increasing the capacity is helping the company gain better profitability. The company’s
earning in proportion to its total assets has uniformly increased; it indicates company is
effectively using its asset s to generate income. Capacity expansion has helped the organization.
ROTA from Core Business: Return of Asset from CORE Business is an indicator of
how profitable company is with respect to its core business only. All other source of

44. incomes are not considered while considering the ratio calculation.
ROTA from CORE Business = (EBIT – Income from Investments / Total Assets –
Investments)*100
2006-07 2007-08
EBIT 3800.9 4084.36
Total Assets 25007.81 30963.47
Investments 8804.78 14107.99
Income From 299.58 579.66
Investments
ROTA from Core 21.61% 20.79%
Business
ROTA from Core Business
21.80%
21.60%
21.40%
21.20%
21.00%
ROTA from Core Business
20.80%
20.60%
20.40%
20.20%
2006‐07 2007‐08
The return from core business has declined because the company has earned
relatively larger income through outside investments. Its better it’s better to invest
in core business as returns from business compared with ROTA are high.

45. ROTA after TAX:
2006-07 2007-08
PAT 2556.35 2259.87
Interest Paid 296.27 518.08
Tax (%) 31 31
Total Assets 25007.81 30963.47
ROTA After Tax (%) 11.03965641 8.45300995
ROTA After Tax(%)
12
10
8
6
ROTA After Tax(%)
4
2
0
2006‐07 2007‐08
As interest payment has increased in year 2007-08 by 93.49 % thus resulting in
reduction of ROTA after tax.
Return on Capital Employed (ROCE): A ratio that indicates the efficiency and
profitability of a company's capital investments.
ROCE = (EBIT / Capital Employed)*100
2006-07 2007-08
EBIT 3800.9 4084.36
Capital Employed 20970.91 27162.7
ROCE 18.12463074 15.03664952
The future maintainable profits have not matched the pace with the increase in
company’s capital employed. The company should try to increase its net current assets to

46. enhance the profitability wiz a vi total capital employed.
Return on Equity (ROE): The amount of net income returned as a percentage of
shareholders equity. Return on equity measures a corporation's profitability by
revealing how much profit a company generates with the money shareholders have
invested.
ROE= {(PAT – Dividend for Preference Shares)/Net Worth}*100
Net Worth= Share Capital + General Reserves – Misc. Expenditure
2006-07 2007-08
PAT* 2556.35 2259.87
Dividend for Preference 0 0.02
Shares
Net Worth 12418.04 17296.74
ROE 20.58577682 13.06517876
*PAT has been adjusted for extra-ordinary items for the three years.
ROE
25
20
15
10 ROE
5
0
2006‐07 2007‐08
Due to decrease in financial leverage Net Worth of company has increased. Also
the future maintainable profit has not increased in the same proportion as the
Net Worth of the company thus ROE for the company has gone down.

47. MARGIN RATIOS
It is the amount of profit (at the gross, operating, pre tax or net income level)
generated by the company as a percent of the sales generated. The objective of margin
analysis is to detect consistency or positive/negative trends in a company's earnings.
Positive profit margin analysis translates into positive investment quality. To a large
degree, it is the quality, and growth, of a company's earnings that drive its stock price.
1. GROSS MARGIN PERCENTAGE (GMP)
A financial metric used to assess a firm's financial health by revealing the proportion
of money left over from revenues after accounting for the cost of goods sold. Gross
profit margin serves as the source for paying additional expenses and future savings.
GMP = (GROSS MARGIN/SALES)*100
2006-2007 2007-2008
SALES 19882.19 20880.45
COGS 13833.89 13614.76
Gross Profit 30.42 % 34.80%
Gross Profit
36.00%
35.00%
34.00%
33.00%
32.00%
Gross Profit
31.00%
30.00%
29.00%
28.00%
2006‐2007 2007‐2008
The GMP has increased because of the increase in gross margin which is in account of relatively
lesser cost of goods sold (COGS). Though the sales have improved the COGS has also gone down.

48. 2. OPERATING PROFIT MARGIN (OPM)
A ratio used to measure a company's pricing strategy and operating efficiency.
Operating margin is a measurement of what proportion of a company's revenue is left
over after paying for variable costs of production such as wages, raw materials, etc. A
healthy operating margin is required for a company to be able to pay for its fixed
costs, such as interest on debt.
Operating margin gives analysts an idea of how much a company makes (before
interest and taxes) on each dollar of sales. When looking at operating margin to
determine the quality of a company, it is best to look at the change in operating
margin over time and to compare the company's yearly or quarterly figures to those of
its competitors. If a company's margin is increasing, it is earning more per dollar of
sales. The higher the margin, the better.
OPM = (OPERATING PROFIT/SALES)*100
2006-2007 2007-2008
OPEARTING PROFIT 4353.7 4672.17
SALES 19882.19 20880.45
OPM (%) 21.90% 22.38%
OPM(%)
22.50%
22.40%
22.30%
22.20%
22.10%
22.00% OPM(%)
21.90%
21.80%
21.70%
21.60%
2006‐2007 2007‐2008

49. The operating profit margin has remained almost stable in 2007-08. The
operating profit has been able to match the increase in sales. It means the level of
operating expenses have been able to match the increase in sales. High operating
profit margin shows that company is in good state and has healthy margins. One
of the primary reasons being that it is the market leader thus is able to command
its position in market.
3. NET PROFIT MARGIN
A ratio of profitability calculated as net income divided by revenues, or net profits
divided by sales. It measures how much out of every dollar of sales a company
actually keeps in earnings. Profit margin is very useful when comparing companies in
similar industries. A higher profit margin indicates a more profitable company
that has better control over its costs compared to its competitors.
Looking at the earnings of a company often doesn't tell the entire story. Increased
earnings are good, but an increase does not mean that the profit margin of a company
is improving. For instance, if a company has costs that have increased at a greater rate
than sales, it leads to a lower profit margin. This is an indication that costs need to be
under better control.
NPM = (PROFIT AFTER TAX/SALES)*100
2006-2007 2007-2008
PAT 2556.35 2259.87
SALES 19882.19 20880.45
NPM (%) 12.86% 10.82%

50. NPM(%)
13.50%
13.00%
12.50%
12.00%
11.50%
NPM(%)
11.00%
10.50%
10.00%
9.50%
2006‐2007 2007‐2008
The reduction in Net profit margin primarily is due to high increase in interest
paid during the year. Also there is a reduction in the leverage of the company,
which combined with negative impact of global recession and price fluctuation
caused Market to Market losses.

51. ACTIVITY RATIOS
Accounting ratios that measure a firm's ability to convert different accounts within
their balance sheets into cash or sales. Companies will typically try to turn their
production into cash or sales as fast as possible because this will generally lead to
higher revenues.
Such ratios are frequently used when performing fundamental analysis on different
companies. The asset turnover ratio and inventory turnover ratio are good examples of
activity ratios.
1. INVENTORY TURNOVER RATIO (ITR)
A ratio showing how many times a company's inventory is sold and replaced over a
period. Although the first calculation is more frequently used, COGS (cost of goods
sold) may be substituted because sales are recorded at market value, while inventories
are usually recorded at cost. Also, average inventory may be used instead of the
ending inventory level to minimize seasonal factors.
This ratio should be compared against industry averages. A low turnover implies poor
sales and, therefore, excess inventory. A high ratio implies either strong sales or
ineffective buying.
ITR = Cost of Goods Sold (COGS) / Average Inventory
High inventory levels are unhealthy because they represent an investment with a rate
of return of zero. It also opens the company up to trouble should prices begin to fall.
2006-2007 2007-2008
COGS 13833.89 13614.76
AVERAGE 4205.2 4706.61
INVENTORY
ITR(times) 3.289710359 2.892689218

52. ITR(times)
3.4
3.3
3.2
3.1
3
2.9 ITR(times)
2.8
2.7
2.6
2006‐2007 2007‐2008
The ITR ratio of the company has decreased a little with comparison to previous
years but still the company is able maintain an ITR which is pretty decent
compared to the industry standards.
2. DEBTORS TURNOVER RATIO (DTR)
An accounting measure used to quantify a firm's effectiveness in extending credit as
well as collecting debts. The receivables turnover ratio is an activity ratio, measuring
how efficiently a firm uses its assets. Some companies' reports will only show sales -
this can affect the ratio depending on the size of cash sales. By maintaining accounts
receivable, firms are indirectly extending interest-free loans to their clients. A high
ratio implies either that a company operates on a cash basis or that its extension of
credit and collection of accounts receivable is efficient.
A low ratio implies the company should re-assess its credit policies in order to ensure
the timely collection of imparted credit that is not earning interest for the firm.
DTR = NET SALES/AVERAGE DEBTORS
2006-2007 2007-2008
Credit SALES 19882.19 20880.45
AVERAGE DEBTORS* 2296.26 2496.845
DTR(times) 8.658509925 8.36273377
*AVERAGE DEBTORS = (OPENING RECEIVABLES + CLOSING RECEIVABLES)/2

53. DTR(times)
8.7
8.6
8.5
8.4 DTR(times)
8.3
8.2
2006‐2007 2007‐2008
The company maintains a very healthy DTR thus suggesting that it has good
relations with all its customers and is able to receive most of the credit sales
payment on the time which in turn is helping it operations.
4. AVERAGE DEBT COLLECTION PERIOD
AVERAGE DEBT COLLECTION PERIOD = Average Debtors / Credit Sales
per Day
2005-2006 2006-2007
Average Debtors 2296.26 2496.845
Credit Sales per day 54.47175342 57.20671233
AVERAGE DEBTORS 42.15505938 43.64601457
COLLECTION
PERIOD(Days)
AVERAGE DEBTORS COLLECTION
PERIOD(Days)
44
43.5
43
42.5 AVERAGE DEBTORS
42 COLLECTION
PERIOD(Days)
41.5
41
2005‐2006 2006‐2007

54. 3. WORKING CAPITAL TURNOVER RATIO (WCTR)
A measurement comparing the depletion of working capital to the generation of sales
over a given period. This provides some useful information as to how effectively a
company is using its working capital to generate sales.
A company uses working capital (current assets - current liabilities) to fund operations
and purchase inventory. These operations and inventory are then converted into sales
revenue for the company. The working capital turnover ratio is used to analyze the
relationship between the money used to fund operations and the sales generated from
these operations. In a general sense, the higher the working capital turnover, the
better because it means that the company is generating a lot of sales compared to the
money it uses to fund the sales.
WCTR = NET SALES/AVERAGE WORKING CAPITAL
2006-2007 2007-2008
NET SALES 19882.19 20880.45
AVERAGE WORKING 3684.96 3690.86
CAPITAL
WCTR(times) 5.39549683 5.657340024
WCTR(times)
5.7
5.65
5.6
5.55
5.5
5.45 WCTR(times)
5.4
5.35
5.3
5.25
2006‐2007 2007‐2008
The company is operating at a Moderate Working Capital turnover ratio, which
ensures that company is generating lot of sales in return of the money it is
investing. Also due to high DTR the company has flexibility of having liquid
assets.

55. 4. FIXED ASSETS TURNOVER RATIO (FATR)
A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a
company's ability to generate net sales from fixed-asset investments - specifically
property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset
turnover ratio shows that the company has been more effective in using the
investment in fixed assets to generate revenues.
This ratio is often used as a measure in manufacturing industries, where major
purchases are made for PP&E to help increase output. When companies make these
large purchases, prudent investors watch this ratio in following years to see how
effective the investment in the fixed assets was.
FATR = NET SALES/AVERAGE FIXED ASSETS
2006-2007 2007-2008
NET SALES 19882.19 20880.45
AVERAGE FIXED 8049.425 8706.175
ASSETS
FATR(times) 2.470013697 2.398349447
FATR(times)
2.48
2.46
2.44
2.42
2.4 FATR(times)
2.38
2.36
2006‐2007 2007‐2008
This ratio has reduced from last year. Capacity in form of fixed assets has
increased but FATR has reduced thus showing that company is working at low
capacity utilization. The global negative effect of recession may be playing the
adverse effect.

56. 5. TOTAL ASSETS TURNOVER RATIO (TATR)
TATR = NET SALES/AVERAGE TOTAL ASSETS
2006-2007 2007-2008
NET SALES 19882.19 20880.45
AVERAGE TOTAL 21957.96 27985.64
ASSETS
TATR(times) 0.905466173 0.746113007

57. CAPITAL STRUCTURE AND SOLVENCY RATIOS
One of many ratios used to measure a company's ability to meet long-term
obligations. The solvency ratio measures the size of a company's after-tax income,
excluding non-cash depreciation expenses, as compared to the firm's total debt
obligations. It provides a measurement of how likely a company will be to continue
meeting its debt obligations
Acceptable solvency ratios will vary from industry to industry, but as a general rule of
thumb, a solvency ratio of greater than 20% is considered financially healthy.
Generally speaking, the lower a company's solvency ratio, the greater the
probability that the company will default on its debt obligations.
1. DEBT-EQUITY RATIO
A measure of a company's financial leverage calculated by dividing its total
liabilities by stockholders' equity. It indicates what proportion of equity and debt the
company is using to finance its assets. Sometimes only interest-bearing, long-term
debt is used instead of total liabilities in the calculation.
Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal
financial statements as well as companies'. A high debt/equity ratio generally means
that a company has been aggressive in financing its growth with debt. This can result
in volatile earnings as a result of the additional interest expense.
If a lot of debt is used to finance increased operations (high debt to equity), the
company could potentially generate more earnings than it would have without
this outside financing. If this were to increase earnings by a greater amount than the
debt cost (interest), then the shareholders benefit as more earnings are being spread
among the same amount of shareholders. However, the cost of this debt financing
may outweigh the return that the company generates on the debt through investment
and business activities and become too much for the company to handle. This can lead
to bankruptcy, which would leave shareholders with nothing.

58. The debt/equity ratio also depends on the industry in which the company operates. For
example, capital-intensive industries such as auto manufacturing tend to have a
debt/equity ratio above 2, while personal computer companies have a debt/equity of
under 0.5.
DEBT EQUITY RATIO = LONG TERM DEBT/NET WORTH
2006-2007 2007-2008
LONG TERM DEBT 14276.24 14221.86
NET WORTH 12418.04 17296.74
DE RATIO 1.14 0.82
DE RATIO
1.4
1.2
1
0.8
0.6 DE RATIO
0.4
0.2
0
2006‐2007 2007‐2008
The Debt Equity Ratio is very less and has reduced as compared to the previous year.
Thus there is in reduction in leverage of the company and most of the operations are
financed through shareholder’s equity.
2. ASSET LEVERAGE RATIO
ASSET LEVERAGE RATIO = TOTAL ASSETS/NET WORTH
2006-2007 2007-2008
TOTAL ASSETS 25007.81 30963.47
NET WORTH 12418.04 17296.74
ALR 2.013829074 1.790133285

59. ALR
2.05
2
1.95
1.9
1.85
1.8 ALR
1.75
1.7
1.65
2006‐2007 2007‐2008
Low Asset Leverage ratio suggests that company is dependent more on the funds
collected through shareholder’s equity. Also the increase in total assets is less as
compared to increase in the Net Worth of the company thus there is a decrease
in the ALR ratio from last year.
3. INTEREST COVERAGE RATIO
A ratio used to determine how easily a company can pay interest on outstanding debt.
The interest coverage ratio is calculated by dividing a company's earnings before
interest and taxes (EBIT) of one period by the company's interest expenses of the
same period: The lower the ratio, the more the company is burdened by debt expense.
When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest
expenses may be questionable. An interest coverage ratio below 1 indicates the
company is not generating sufficient revenues to satisfy interest expenses.
INTEREST COVERAGE RATIO = EBIT/INTEREST
2006-2007 2007-2008
EBDITA 4353.7 4672.17
INTEREST 296.27 518.08
ICR 14.69504168 9.018240426

60. LIQUIDITY RATIOS
A class of financial metrics that is used to determine a company's ability to pay off
its short-terms debts obligations. Generally, the higher the value of the ratio, the larger
the margin of safety that the company possesses to cover short-term debts. Common
liquidity ratios include the current ratio, the quick ratio and the operating cash flow
ratio. Different analysts consider different assets to be relevant in calculating
liquidity. Some analysts will calculate only the sum of cash and equivalents divided
by current liabilities because they feel that they are the most liquid assets, and would
be the most likely to be used to cover short-term debts in an emergency.
A company's ability to turn short-term assets into cash to cover debts is of the utmost
importance when creditors are seeking payment. Bankruptcy analysts and mortgage
originators frequently use the liquidity ratios to determine whether a company will be
able to continue as a going concern.
1. CURRENT RATIO
A liquidity ratio that measures a company's ability to pay short-term obligations
The ratio is mainly used to give an idea of the company's ability to pay back its short-
term liabilities (debt and payables) with its short-term assets (cash, inventory,
receivables). The higher the current ratio, the more capable the company is of paying
its obligations. A ratio under 1 suggests that the company would be unable to pay
off its obligations if they came due at that point. While this shows the company is not
in good financial health, it does not necessarily mean that it will go bankrupt - as there
are many ways to access financing - but it is definitely not a good sign.
The current ratio can give a sense of the efficiency of a company's operating cycle or
its ability to turn its product into cash. Companies that have trouble getting paid on
their receivables or have long inventory turnover can run into liquidity problems
because they are unable to alleviate their obligations. Because business operations
differ in each industry, it is always more useful to compare companies within the
same industry.

61. This ratio is similar to the acid-test ratio except that the acid-test ratio does not
include inventory and prepaids as assets that can be liquidated. The components of
current ratio (current assets and current liabilities) can be used to derive working
capital (difference between current assets and current liabilities). Working capital is
frequently used to derive the working capital ratio, which is working capital as a ratio
of sales.
CURRENT RATIO = CURRENT ASSETS/CURRENT LIABILITIES
2006‐2007 2007‐2008
CURRENT ASSETS
14920.31 17510.67
CURRENT LIABILITIES
4036.9 3800.77
CURRENT RATIO 3.695982065 4.607137501
Current Ratio of the company is very high w.r.t to industry standards which is
2:1. Current ratio has increased thus company is in better position to meet short
term liabilities. It is a good sign of financial health.
2. LIQUID RATIO
A stringent test that indicates whether a firm has enough short-term assets to cover its
immediate liabilities without selling inventory. The acid-test ratio is far more
strenuous than the working capital ratio, primarily because the working capital ratio
allows for the inclusion of inventory assets.
Companies with ratios of less than 1 cannot pay their current liabilities and should be
looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than
the working capital ratio, it means current assets are highly dependent on inventory.
Retail stores are examples of this type of business.

62. LIQUID RATIO = LIQUID ASSETS/CURRENT LIABILITIES
2006-2007 2007-2008
LIQUID ASSETS 3155.46 2650.71
CURRENT
LIABILITIES 4036.9 3800.77
LIQUID RATIO 0.78165424 0.697413945
The low value of the liquid ratio suggests that company’s current assets are
highly dependent on inventories, thus company may face difficulties in resolving
short term liabilities.