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Cover Story
 

Enter ‘Tactical’ Strategy
In a Superlative & most Insightful analysis, B&E Documents how Corporate Leaders have Transformed their Organisations & Implemented continental strategic shifts that have Rewritten Global Management case books
Issue Date - 17/02/2011
 
All for a global dream

Acquiring Novelis in 2007 was a transformative and riskiest shift for Hindalco towards the global markets. But China and Europe ensured Novelis became Hindalco’s largest and strongest bet.
By : Mona Mehta

On February 11, 2007, when Hindalco Industries took over the reins of Novelis Inc. for a staggering $5.76 billion funded by a $3.03 billion bridge loan to become the world’s largest producer of aluminium rolled products, many anticipated that Hindalco was on a rough road. In addition, considering the fact that at the time of acquisition, Novelis had a debt of $2.33 billion on a net worth of $322 million (a debt-equity ratio of 7.23:1), almost every one – including yours truly – was convinced of the fact that Hindalco’s financials and future would be massacred at the altar of globalisation efforts. The prognosis became worse with the worst recession in recent times hitting the global economy.

As luck would have it, China never realized that there was recession – and its aluminium consumption, while becoming the largest in the world, also continued to grow at obscene double digit figures. With fortune shining, even Europe’s resurgence in aluminium consumption (see chart) added to Novelis’ sweepstake returns. After four long years down the line, it now seems as if the risk has paid off, and that too handsomely for Hindalco. Novelis, which had a net loss of $62 million in FY2008, is now flying high with an expected EBITDA of $1.1 billion in FY2011. On top of it, by 2014, this Atlanta-based subsidiary of Hindalco is planning to add another 20% to its aluminium production capacity of three million tonnes. As part of these expansion plans, which certainly are part of the company’s global strategies, Novelis will now increase its capacity through Brownfield expansions of plants in emerging markets, such as Brazil. For records, Novelis will invest about $300 million through de-bottlenecking and new capacity addition at Pinda in Brazil and interestingly, the 220ktpa Pinda project is expected to be completed by 3QCY12.

Not to take credit away, Hindalco’s three-pronged strategy – cost leadership, price leadership and capability leadership – to fulfill its global dreams have actually played a key role in the dramatic turnaround of Novelis, which is a case study in itself. Under these, while the company on one hand focused on its raw material procurement to reduce cost, on the other hand, under price leadership, Hindalco made sure that the company reached out to more products and geographies, which offered strong growth potential. This, coupled with Novelis’ strength in high-end technology, has allowed the company to generate growing cash flows. A well planned restructuring combined with the expiry of price ceiling contracts added to the working capital factor in generous amounts.

 
For that matter, on a standalone basis, Hindalco too has come up with robust performances. After posting a net profit of Rs.19.15 billion in FY2010, it is now expected to book a profit of Rs.23.59 billion in the current fiscal. And with Novelis contributing to the cause, this Aditya Birla Group company is now most expected to reap some smart returns from the strategy shift that they opted for in 2007. That leaves no doubt as to why Hindalco has outperformed all its industry peers at Dalal Street. Over the past 12 months stocks of the company have offered a return of over 55%, as compared to 4% appreciation by Nalco and negative return of around 10% by Sterlite.

Hindalco is now focusing on tripling its aluminium production capacity in India through both Greenfield and Brownfield projects. Comments Sanjay Jain, Senior VP, Motilal Oswal Securities, “Hindalco has put domestic Greenfield projects on the fast track to add 718ktpa of capacity by the end of FY2012. Its Aluminum production is expected to post 21% CAGR and alumina 28% CAGR over FY2010-14.” At the same time, Hindalco’s new smelting capacities are coming close to energy sources and alumina facilities are expected to be set up close to bauxite mines. And these will ensure low cost of production for the company allowing it to further strengthen itself on cost and price matters.

Yes, success in transformative strategic shifts require huge doses of luck. And without doubt, the economic recession was the worst of luck that any leader could have hoped for, after having made a $5.76 billion purchase to undertake one of India’s biggest geographical strategic shifts. Thomas Jefferson, the third US President, once quoted, “The more I work, the luckier I seem to get.” Decades later, Donald Trump plagiarised the quote to his advantage and made the most of it in real life. Some years later, Kumar Mangalam Birla is putting that same statement into action.

          

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