One of the overwhelming reasons for the stock markets not reacting positively to the highly successful visit of the American president to India, was the imminent year end considerations. However, the significance of the meetings that the American businessmen who accompanied Mr Clinton had with both the political and industrial leadership cannot be under estimated. The closed-door meetings of Dhirubhai Ambani with Mr Clinton may not go in vain and the market may suddenly discover several long-term changes in the Indo-US corporate relations. The FIIs increasing their stake in India and several Indian companies accessing NASDAQ and NYSE are also on the cards. The markets are therefore ripe for a major breakthrough during the first week of April.

In the backdrop of this latent breakthrough, the event that caught the attention of the investing public during the week was the acquisition of the controlling stake of Indal by Hindalco. It was a very significant move on the part of Hindalco to consolidate its position in the Aluminium industry by taking a formidable competitor over to their side.

Over the last three years, Hindalco had pushed its sales up from Rs 1316 crores in 1997 to Rs 2004 crores March 1999. The Net profit also moved up from Rs 396 crores to Rs 566 crores during the same period. With an equity of Rs 74.47 crores, the EPS therefore moved from Rs 52 in 1997 to Rs 75 in 1999. The share price is presently around Rs 735, a day after the formal announcement of the take over with a P/E of around 9.5.

In comparison, Indal had a turnover of Rs 1021 crores in 1999 with a profit after tax of Rs 73.78 crores on an equity base of Rs 71.11 crores. This EPS of around Rs 10.4 reflected in a market price of around Rs 130, which showed a discounting of around 12.5.

After the current acquisition of a stake of 54.6 % in Indal by buying out the foreign equity partner Alcan at a price of Rs 190 per share, Hindalco has also made an open offer for acquiring another 20% stake as per take over norms. After this goes through, it may be possible for the two companies to formally merge into a single entity.

However, for Hindalco, this acquisition means much more to than a notional addition of profit figures. The real benefits are in the improved efficiency in the market place, better product mix and economies of production.

The two companies had much complementary strength, which can now be harnessed for the betterment of the shareholder’s wealth. For example, Indal was strong on downstream products such as rolled products and foils while Hindalco was far ahead in basic metal production. Hindalco had insufficient Alumina and down stream capacity and had to outsource its needs. Similarly, Indal had to resort to imports to meet its metal needs. The alliance will therefore benefit both companies in the short term and lead to very significant market advantages to the combined entity. The combined entity will roughly control 50 % of the country’s total aluminium capacity and have 80 % market share in the down stream products. Naturally, in the emerging business place where global competition is a reality, this aggregation provides an opportunity to multiply the share holder wealth in the next two to three years.

Hindalco is also planning to list its shares in the New York stock exchange and this should by itself give a thrust to the share value in general and prices in India.

Hindalco should catch investor fancy as one of the key conventional industry stocks to have in their portfolio because of the criticality of Basic metal production to any economy and more so that of Aluminium.

Na.Vijayashankar

25^th March 2000