Advantage Indal?

The issue of whether Indal needs a helping hand is being raised as its performance has been below the mark during the past two years. For the year ended March 1997, net profit declined 48 per cent over the previous year to Rs 59.2 crore.

The first half of 1997-98 too saw net profit drop 41 per cent to Rs 22.54 crore over the corresponding period last year. With the fiscal close only a short distance away, the company's performance in the second half of 1997-98 will impact the present management's power, either way.

Indal's woes lie in not having adequate captive power generation facilities, which is adversely affecting 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 forms nearly 35 to 40 per cent of costs and regular hikes in power tariffs further affected profitability.

 

As a result Indal's cost of purchased power increased by nearly 20 per cent.

The effect on the share price has been telling as it has fallen from a level of Rs 155 in August 1997 to around Rs 66 before Sterlite's move became public. The share is at present trading around Rs 80.

However, Indal has not been idle all this while and has taken initiatives to overcome its handicaps. At present, it is setting up a 100mw captive power plant with a Rs 350 crore outlay to partly re-energise --40,000 out of a total of 73,000tpa capacity-- the Belgaum smelter.

It is also doubling smelter capacity at Hirakud to 60,000tpa at a cost of Rs 560 crore. To meet the increased power requirements, the company is setting up a 67.5mw 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 10 lakh tpa export oriented alumina unit with a Rs 4,000 crore outlay. Indal's current measures will take at least a couple of years before they produce results. The timely execution of these projects too is crucial which will largely depend on the company tying up finances on time.

Considering the size of investments, and based on reports indicating that Indal is looking for equity participants for some projects, Sterlite with its sizeable bank balance seems to fit the bill.

Its expertise in successfully implementing a one lakh tpa copper smelter (despite stiff opposition from environmentalists and locals) will also prove useful. The substantial delay in the progress of its alumina project, for which the company received the letter of intent way back in 1992, led to reports that the government had doubts about its feasibility.

Indal is targeting the overseas markets for alumina and downstream products to spur growth.

Apart from Alcan's marketing infrastructure, Indal can benefit from Sterlite's trading skills too. Sterlite's proposed aluminium smelter (with a captive power unit) is coming up in Orissa. Along with the locational advantage (proximity to Indal's smelter unit at Hirakud) this unit will also provide backward integration advantages for Indal's existing capacity and will facilitate further expansion.