Hindalco'S India Foils Acquisition Spawns Win-Win Situation

India Foils of Williamson Magor group, last week announced a preferential allotment ceding 51 per cent control to two wholly owned companies of the Mumbai-based aluminium major, Hindalco Industries of the Aditya Birla group.

According to Deepak Khaitan, vice chairman, Magor group, the decision to divest the controlling stake was a part of the restructuring exercise undertaken by the company.

The Magor group now plans to focus on its core businesses of tea and batteries.

According to Kumar Managalam Birla, chairman, Hindalco, the acquisition of India Foils will strengthen Hindalco's position in the aluminium foil industry.

The aluminium majors' market share will go up from the present 11 per cent to 55 per cent overtaking Indal's 24 per cent.

In the light of the acquisition it may worthwhile to analyse the financial performances of both companies and see how far the acquisition will boost Hindalco's overall performance.

In 1997-98, Hindalco registered a 27.7 per cent increase in sales turnover, while India Foils sales grew by 3.03 per cent.

There was a general slow-down in both the domestic and international markets.

Most of the major aluminium producers witnessed lower offtake due to sluggish conditions and inventory corrections by end-users.

India Foils utilised 65 per cent of aluminium foil and laminated flexible packages producing capacity.

Due to a fall in capacity utilisation and price erosion, the company was forced to offer discounts. Though the company's operating profit recorded an increase of nearly 28 per cent, it incurred a net loss of nearly Rs 4 crore due to heavy interest burden and depreciation. Interest outgo increased by 82.3 per cent, while provision for depreciation shot up by more than 157 per cent .

The interest and depreciation impacted the bottomline and other financial ratios suffered.

Compared with previous year, Hindalco Industries increased its production by 20.5 per cent.

Though the aluminium industry, in general, showed a decline in terms of sales and profits, the company substantially improved its operating profit by 22 per cent.

Despite a 48 per cent increase in interest burden and over 83 per cent increase in depreciation during the year, Hindalco registered an increase of 14 per cent in its profit before tax and 30 per cent increase in net profit and its financial ratios like operating profit margin, return to networth and return on capital employed improved considerably.

According to analysts, Hindalco's strategy for acquiring India Foils is fairly obvious even though market conditions may not be favourable.

It will help the Aditya Birla company to maximise profits from metal sales in the short term while it waits for foil demand to pickup in the international and domestic markets. As Hindalco is the low cost producer , the transfer of metal to India Foils at prevailing domestic prices will enable Hindalco to sharply increase its profitabilities.