Sterlite Bids For Indal
Sterlite Industriess (SIL) bid to pick up 10 per cent stake in Indian Aluminium (Indal) through an open offer at Rs 90 took the stock market by surprise. With Sebis intervention, Sterlite has currently increased the offer to 20 per cent. What makes Indal such a good investment (takeover) proposition? How will the shareholders of both the companies be affected?
Sterlite which earlier acquired a controlling stake in Madras Aluminium (Malco) will be attempting to become the countrys top non-ferrous metal producer through the current acquisition.
However, if Sterlite has to take a controlling stake, it has to acquire at least a minimum of 30 per cent at a later stage. Prabhat Awasthi, analyst, SSKI Securities, opines, Since the total acquisition cost will be around Rs 200 crore, it may not be a major problem for the cash-rich Sterlite. Sterlite had a healthy balance sheet with cash and bank balances of Rs 330 crore at the end of June 1997. Also, its debt-equity ratio of 1.1 makes it comfortable to go in for additional debt.
Despite Sterlites financial muscle to acquire Indal, the question is whether the offer will get a good response. This is particularly so because the public holding in Indal is just 9.1 per cent. And the other shareholders where it can get it from, the FIIs, NRIs and OCBs hold a stake of 4.6 per cent only. Since the current market price of Rs 82.50 is close to offer price, many shareholders might not wish to go for this offer.
Market sources say, since the institutions have a holding of around 36 per cent stake, Sterlite may rope in the remaining 20 per cent from any of the institution. However, according to ICICI Securities the institutions may oppose such a hostile takeover which had happened in some similar cases earlier.
Some analysts are skeptical about the open offer without any prior accumulation from the secondary market. However, market sources say, since the floating stock is quite low, the price would have soared by such accumulation and inflated the open offer price.
As market sources say, it is quite unlikely that Sterlite will garner the full 20 per cent at the current offer price, it may have revise the offer price upwards. In that case, it remains to be seen as to what will be the ceiling price Sterlite can afford for the acquisition of a company that has not performed well in the last couple of years.
In 1996-97, Indals net profit declined by 48 per cent to Rs 59.2 crore compared to 1995-96. The first half of 1997-98 too has seen its net profit drop by 41 per cent to Rs 22.54 crore.
Indals lapse lies in not having adequate captive power generation facilities, which is adversely affecting its performance. Its smelters operated at just 32 per cent capacity in 1996-97 due to power shortages. This led to outsourcing of metal which hiked its raw material costs considerably. Moreover, power constitutes nearly 35 to 40 per cent of the cost and regular hikes in power tariffs further affected its profitability. Indals cost of purchased power increased as a result by nearly 20 per cent.
However, Indal has now learnt from its past mistakes and is streamlining operations and setting up new facilities since the last two months. Indal has set up a new continuous casting project in Orissa and its sheet mill in Maharashtra has been upgraded.
At present, it is setting up a 100 MW captive power plant with an outlay of Rs 350 crore to re-energise 40,000 tonnes out of the total of 73,000 tonne capacity at the Belgaum smelter. It is also doubling smelter capacity at Hirakud to 60,000 tonnes at a cost of Rs 560 crore. To meet the increased power requirements, it is setting up a 67.5 MW captive power plant at Hirakud with an outlay of Rs 237 crore.
The mega project on its hands is the Utkal Alumina Project for setting up a 1 million tonne export-oriented alumina unit with an outlay of Rs 4,000 crore. The timely execution of these projects too is crucial which will largely depend on Indal tying up finances on time. Considering the size of investments, and reports indicating that Indal is looking for equity participation in some projects, Sterlites sizable bank balance and its past track record in its smelter project seems to fit the bill. But this will only happen if the deal goes through.
Indal is targeting overseas markets for alumina and downstream products as a major thrust area. Apart from Alcans marketing infrastructure, Indal can benefit from Sterlites trading skills too. Sterlites proposed aluminium smelter is coming up in Orissa, which will also provide backward integration advantages for Indals existing capacity for value added products and will facilitate further expansion and growth.
According to Sterlite sources, if the takeover is a success the company may even revamp Indal to become a major primary metal producer again. Then the company can go slow on its alumina refinery to be located at Jharsuguda in Orissa. This project will come up near the bauxite mines in the Kalahandi district and the project cost at Rs 2520 crore.
As a long-term investor in Indal, it makes every sense to wait and watch for Alcans next step. The investor can expect a higher offer price at a later time.