Hindalco Case Study

Benefits
• One of the major benefits that accrued to Hindalco from this acquisition was the increase in its global presence. The management of Hindalco concurred to the fact that the Hindalco Novelis acquisition would enable them to further internationalize Hindalco’s operations. Novelis was the second largest company in aluminium recycling in North American continent and the pioneer in production of rolled products in European, South American and Asia Pacific markets. With the takeover, Hindalco now has these glories and the control to itself.
• As we know that the aluminium products are very much less cyclical in terms of price fluctuations than the raw aluminium metal itself, the Hindalco-Novelis acquisition would offer Hindalco a much more

Also, 20 per cent of the group's total workforce would also be based outside India
• Hindalco, which already exports 16% of its total sales volume, is one of the lowest-cost makers of aluminium. In buying Novelis, the combined company would gain significant synergies in supplying Novelis’ customers, ranging from Ford Motor Co. to Eastman Kodak and Coca-Cola Co., and spread across 11 countries.
• Hindalco would have dominant imprint in the aluminium business recycling because of this deal which is the next big thing in the aluminium business which Hindalco was lacking until now.
• The biggest benefit to Hindalco, however, was the access to the most sophisticated and advanced technology in the industry that Novelis had at its disposal.
Risks
• It is calculated that Hindalco’s net debt to equity ratio will go up by two hundred and thirty-six percent, with net debt to EBITDA ratio reaching about 5.0 x. Novelis had a belief that these contracts’ exposure would reduce to greatest to ten percent of 2007 sales. Though it sounds good to hear, it could be believed Novelis would remain a tough to turn through

These contracts had to live their life and would expire in 2010.This along with any drastic price changes would definitely impact the profitability of the consolidated Hindalco GroupThe first and foremost challenges for Hindalco would be to tide over the substantial portfolio of problem contracts which Novelis had locked it into fixed selling prices for many years.
• The second hindrance would be to minimize possible losses by hedging against increasing raw material costs. In the initial years of acquisition, Novelis might become a drag on Hindalco's bottom-line. The net profits of Hindalco can come into the rescue of Novelis in the initial few years when both the revenues and the volume produced may reduce on the shelf
• Hindalco would migrate to downstream rolled down products business (low margin) from metal business (high margin).
• Although Hindalco’s revenues will be more than tripled with this acquisition, the debt would increase and the profitability will erode at the same time. Value would be generated by this deal only after Hindalco complete its expansion plans, and since its position is highly leveraged, it might affect the expansion