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BW Businessworld

From One Pocket To Another

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Kumar Mangalam Birla will spend again from his pocket. AV Birla group firm Hindalco Industries plans to raise Rs 2,000 crore from the promoters for equity funding of its greenfield projects. The non-ferrous metal maker will issue up to 150 million preferential warrants which, if fully subscribed, will see a 7.8 per cent rise in its equity base.

According to managing director D. Bhattacharya, the Hindalco board has approved the preferential offer for funding the expansion programme. The shareholders' approval will be sought at the extraordinary general meeting on 7 March. The price of the warrants is expected to be finalised before the meeting.

Through the preferential issue, the firm aims to put up a strong equity position in the upcoming aluminium projects Utkal and Mahan. As in the third quarter, the company looks to maintain a comfortable debt-to-equity ratio of 0.5:1. Ravindra Deshpande, analyst at Elara Securities, says that the promoters are showing their confidence in the upcoming projects of Hindalco by infusing the capital.

The other aspect of the move is that the Birla family will increase its stake in the flagship business to 37 per cent from 32 per cent. Ten years ago, the promoters' stake was below 23 per cent in the company and has since risen consistently through preferential and creeping acquisition routes. Last in 2006 and 2007, Birla had subscribed the warrants and converted into equity. The fund thus raised had been partly used for the $6-billion acquisition of Canadian can-maker Novelis.

Hindalco had issued Rs 1,400 crore worth of preferential warrants to the promoters in 2007. In 2009, it raised Rs 2,800 crore through a qualified institutional placement (QIP) route for the equity capital. In the same way, the mini conglomerate in the group, Aditya Birla Nuvo, has also issued preferential shares to the promoters many times.

Low-cost capital is the most needed one for Hindalco at this hour. It is pursuing a $6.5-billion investment plan for the next three years to build new plants and expand existing capacities.

About Rs 10,000 crore will be spent in this financial year, mainly for Utkal and Mahan aluminium projects. Capacity will also be expanded at Novelis's plants in South America and South Korea.

In the last annual general meeting, Birla admitted delays in the three largest projects — Mahan Aluminium, Aditya Alumina and Utkal Alumina. "It was due to the delay in obtaining environment clearances and procuring land," he said. Hindalco completed financial closure of the Mahan project in March 2011 by raising Rs 7,875 crore from four arrangers and 31 banks. Two years ago, the company had tied up with a group of banks for Rs 4,906 crore debt for the Utkal project.

With the focus on these two projects, analysts expect a delay in the plans to raise debt for Hindalco's three other projects — the aluminium and refinery projects in Orissa and an aluminium plant in Jharkhand.

The company, which is expected to raise about Rs 23,000 crore in debt for these projects, prefers a 75:25 debt-equity ratio. "At present, the interest rates are high. Hindalco is waiting for it to mellow down," says an executive with a global bank. Hindalco has debt of about $5 billion at the consolidated level, including the debt raised for acquiring Novelis in 2007.

From the cash flow point of view, the next two-three quarters look bleak for Hindalco as the input costs rise in aluminium business. Its December quarter earnings were a mixed bag. The domestic copper business has performed in terms of better output and margins. But this was offset by lower margins in the aluminium business. Besides, the performance of Novelis came under pressure during the quarter.

(This story was published in Businessworld Issue Dated 27-02-2012)