Galloping Ahead

Acquisitions power firms up the rankings

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Looking at Tata Steel’s financial results for FY09, the return to normal levels of profitability suggests that financial charges from the acquisition of Corus are almost complete.

True, the costs at the Anglo-Dutch steel maker are still high — it reported a loss of $117 a tonne for the first quarter of fiscal 2009-10. But Tata Steel’s European operations were running at a low of 53 per cent capacity utilisation. Coking coal costs — at $300 per tonne, based on a contract that thankfully will expire this year — were another contributing factor to Corus’s losses. This year, these cost reductions and a volume increase are enough to take Corus back to profitability.

There is more good news. In 2010, Tata Steel will complete its 3 million-tonne domestic expansion that will add a structural (read sustainable) increase in margins over the next two years of about 2.5 per cent. The continuing cost  of the restructuring exercise at Corus will add some more to margin increases. The company has also reduced its overall debt position to more comfortable levels — it raised $500 million in global depository receipts to achieve this.

Domestic demand, which was flat in FY09, is expected to rise to about 8 per cent, driven by both housing and infrastructure. Increases in the supply of steel, on the other hand, are expected to remain restricted over the next few years — most greenfield projects have been plagued by delays in environmental clearances, land acquisition and allocation of mineral resources. Here is where Tata Steel’s backward integration into mining has paid off, and positions it to do better than most of its peers.

Of course, there is a certain amount of protectionism at work too: a 5 per cent import duty on steel is also likely to keep domestic prices at a premium to international prices. Most analysts suggest that while domestic short supply will keep prices up, any increase in the premium could result in a sharp increase in imports. Till then, Tata Steel will go from strength to strength.  This year it entered the hallowed zone of India’s top 5 biggest companies.

Srikanth Srinivas

Every big-ticket global acquisition in 2007-08 pulled down the Indian acquirer’s balance sheet in that fiscal. So Aditya Birla group-owned Hindalco Industries is no exception as far as its $6-billion (around Rs 28,200-crore) acquisition of Canada’s Novelis is concerned. But if the entire financial year’s net profit stands in the positive at Rs 485 crore, that is largely because of a tax reversal of Rs 953 crore. The company’s revenues have, however, shot up from Rs 19,201 crore before the Novelis acquisition to Rs 65,625 crore after accounting for Novelis in 2008-09.

Yet, despite Hindalco’s attempts at becoming an integrated aluminium player and becoming one of the world’s largest downstream producers following the Novelis acquisition — it sells 30 billion cans of every 50 billion cans produced in the world, Hindalco will remain as vulnerable to aluminium cycles as any other metals major. Because global inventory of aluminium is at a record high and projections say that international aluminium prices are likely to remain subdued for at least the next two-three years. This is despite the fact that aluminium is considered the metal for the next generation because of its versatility, strength, low weight and corrosion resistance.

Globally, aluminium prices have declined by 14.02 per cent on the London Metal Exchange and this has resulted in lower realisation for both Hindalco and Novelis. Hindalco can bank a bit on its copper business (roughly 20 per cent of revenues), but the wild fluctuations in copper prices make it an unreliable commodity.

Although the company’s price to earnings (P-E) ratio and return on capital employed (RoCE) are faltering, Hindalco hopes to compete with the likes of Alcan, Alcoa, Rio Tinto and BHP Bilton as an integrated player (from bauxite extraction to aluminium manufacturing to retailing of aluminium products). Equity research firm Motilal Oswal, however, continues to maintain a ‘sell’ rating on the Hindalco stock as of now. “Financial leverage and outstanding derivative contracts will drag the bottom line. Capital expenditure for greenfield projects will increase the overall financial leverage further…,” says a Motilal Oswal research report on the metals sector.

Vishal Krishna

Wind power major Suzlon Energy has been in the news for varied reasons lately. There’s completion of a 19.5-MW project for the Gujarat Mineral Development Corp. ahead of schedule, winning a repeat order from Turkey-based Ayen Enerji. Then there are reports of the Tulsi Tanti (chairman and MD) family offloading 4.5 per cent stake — reducing their holding to 53.08 per cent of the paid-up capital — in the company. The firm has also been raising funds to reduce debt and fuel expansion — it raised $201.9 million through global depository receipts and $93.9 million worth of zero-coupon convertible bonds in July this year.

Suzlon is also striving to get over the blade crack issue that surfaced in late 2007 in the US. The problems initially slowed orders for Suzlon, opening the door for competitor General Electric. Nevertheless, Suzlon held over 50 per cent of the Indian market and 12.3 per cent of the global market in 2008, thanks to its acquisition of Germany’s REpower Systems.

According to an analyst with Religare Capital Markets, “Suzlon has primarily been combating two major issues, one of debt (Rs 14,000 crore) and the other of the cracked blades. The latter has been fixed and is behind them now. But the debt issue is yet to be resolved. The amount got compounded due to the REpower acquisition.”

Suzlon might have witnessesed a slowdown in the US market, but its market share in Australia and New Zealand has been growing. The company plans to set up a manufacturing unit in China, a rotor blade facility in the US and a forging and foundry plant in India, increasing its capacity from 1,500 MW to 4,700 MW. With signs of revival becoming evident, Suzlon can breathe easy and hope to win more orders. Suzlon moved up to No. 16 in this year’s BW ranking.

Dhanya Krishnakumar

When Aban Offshore’s oil rigs remained idle amid a major recovery in global crude prices in early 2009, analysts were concerned about the firm’s immediate future. The Rs 3,050-crore company was also grappling with a debt of $3.2 billion (as of 31 March 2009), part of which needs to be refinanced quickly. While the competition cut new deals in a flurry, Aban’s expensive, young fleet of 20 rigs was not finding its feet on the seabed. 

However, as the skies brightened with a spurt in global exploration and production activity, Aban finally found takers for its four rigs in August with a total contract value of $695 million. “These have definitely put to rest the doubts on Aban’s debt servicing and refinancing capabilities and gradually improving outlook on shallow water drilling,” says Ajit Motwani of Emkay Research. According to Reji Abraham, managing director of Aban Offshore, as most of his rigs are aged between two-three years, prospects of long-term contracts are bright as his competition had cancelled orders for rigs soon after the market collapsed. “Operators prefer new rigs for drilling,” he says.

Despite lucrative contracts, a high debt burden and expected cumulative cash flows of $780 million over 2010-12, could escalate the debt-equity ratio to 3.8 times. “The level of leverage still needs to come down for long-term financial sustainability, particularly in cyclical offshore drilling business,” says Motwani. Aban Offshore has moved up to No. 48 from No. 203 last year. 

Sreevalson Menon

Rain Commodities, a little-known Hyderabad-based company promoted by N. Radhakrishna Reddy and Jagan Mohan Reddy, has made the most spectacular jump in this year’s BW 500 rankings. Two factors have helped. One, the company became the holding company of parent Rain group in July 2007, bringing under its fold Rain Calcining, which manufactures calcined petroleum coke (CPC) — used in aluminium and steel industries. Two, its 2007 acquisition of Texas-based CII Carbon, then the world’s second-largest CPC producer. “Restructuring of our business, cement business expansion and acquisition of CPC business in the US has been three growth drivers for the company in recent times,” says Srinivasa Rao, vice-president for finance at Rain Commodities.

The CPC business accounts for 80 per cent of Rain Commodities’ revenues and profits; the rest comes from cement, which it markets as Priya Cement. In fact, Rain Commodities is the world’s largest CPC producer with a global market share of 13 per cent (in terms of capacity).

The global demand for aluminium is expected to fall by 7 per cent in 2009, and steel demand is also sluggish. The company is, however, confident of tackling this, thanks to its long-term relationships with oil refiners — they provide 80 per cent of raw material — and smelters. Sales to aluminium smelters are based on multi-year contracts, assuring offtake for the company in a downturn. Its US subsidiary CII Carbon also has close to 50 years of experience and leadership in the CPC space, which Rain Commodities hopes to leverage to its benefit.
 
Muthukumar K.

Copyright 2008 Businessworld.in