ALUMINIUM INDUSTRY

ANALYSIS
Prof. Sanjeev Patkar
VALUE CHAIN
ANALYSIS
V A LU E C H A IN A N A LY S IS
uxite is refined to alumina by mixing it with caustic liquor

Downstream Processes
Upstream Processes

s (Bauxite, Caustic Soda, petro coke, Alumina

coal tar, LS/FS furnace Aluminum
oil)
1.Primary aluminum, such as molten metal, re-melt ingot and sheet ingot. It
2.

3.Recycled aluminum

Alumina is then reduced to aluminium through the electrolytic process. It is also known
ts of bauxite will give me 33 units of alumina which in turn will give 18 units o

The finished products can be divided into 3 broa

Aluminium rolled products
Extrusions
the aluminium products can be manufactured :
Foils
et ingot,such
cessess a rectangular slab
as annealing of aluminium
, coating as
, leveling a starter
or
Redrawn rods material
slitting to achieve the desired thicknesses
t convert molten metal directly into semi finished sheet
The end use markets for aluminium are as follows
1.Construction (22%)
2.Packaging (15%)
3.Transportation (28%)
4.Electrical (12%)
5.Engineering (10%)
6.Consumer Durables (9%)
7.Others (4%)

Downstream Processes
PORTER’S 5 FORCE MODEL
Porter’s Five Force Model
Bargaining Power of
Suppliers
 Bargaining Power of the Suppliers -
Bauxite
 Bauxite contributes significantly in the cost of
production


 Abundant Bauxite Reserves

The contribution of Bauxite to the cost of production is t


 Presence of captive Bauxite Mines

 India has 3bln tonnes of Bauxite reserves which accoun



 Bargaining Power of the Suppliers -
Power

 Presence of Captive Power Plants



 Power constitutes to 35%-40% of the total
production costs and provides significant
advantages to the Indian producers

 As the selling price of aluminium falls below
the cost of production many players have
also started selling power
 Bargaining Power of the Suppliers -
Alumina
 A decrease in the prices of alumina reduces the
cost of non integrated players but is
detrimental to the interests of the integrated
players

Alumina accounts for 32% of the costs

 Bargaining Power of the Buyers

 The government has imposed a safeguard duty

of 35% which would protect the domestic
players

 The import duty stands at 5% and an additional
surcharge of 3%

 The proportion of rolled products is only 0.2% for
NALCO and13% for Hindalco

 The company has to adhere to demanding
customer standards in value added products
segment
 Threat of Substitutes
 Aluminium is still an under researched
metal


 The main substitutes for aluminium are

plastic, wood and glass.


 The Indian Aluminium Industry

comprises of only 2 dominant players.
 Potential Entrants
 The Aluminium Industry is capital and
technologically intensive


 The new entrants will also have to build

their own captive power plants



Power constitutes 35-40% of the operating co
 Factors Affecting Supply
 Production Capacity : The addition of production capacity
requires large capital investments and significant plant
construction or expansion, and typically requires long
lead-time equipment orders.

 Alternative Technology : Advances in technological
capabilities allow aluminum rolled products producers to
better align product portfolio and supply with industry
demand.

 Trade : The imposition of a safeguard duty of 35% would
lower imports in the country

 In 2006 China accounted for 25% of the total primary
aluminium production in the world. It has cut production
to the extent of 4 mln tonnes
 Factors Affecting Demand
 Economic Growth

 Substitution Trends : Manufacturers’ willingness to
substitute other materials for aluminum in their products
and competition from substitution materials suppliers also
affect demand.

 Downgauging

 Seasonality : Cold drinks and construction in the summer

 Scope for Growth : The per capita consumption of aluminium in
India continues to remain abysmally low at 0.6 kg as against
nearly 25 to 30 kgs in the US and Europe, 15 kgs in Japan, 10
kgs in Taiwan and 3 kgs in China.
BUSINESS MODEL
NALCO
 Business Model
The company is enhancing its scale, using its captive
resources to become one of the lowest cost producers of
aluminium in the world

Cost Leadership

Access to cheap resources

Enhance Scale
Improve Efficiency
 Sizeable Global Presence
qA sizeable proportion of
NALCO’s sales are from the
overseas markets
q
q
qNALCO has a 4% market share in
the global Alumina trading
space
Cost Leadership
 Cost Leadership
 Nalco owns and operates one of the
largest one of the world’s largest and
highest quality bauxite mines (210 mln
tonnes)


 It has mines close to its smelters in

bauxite


 Power plants are also in close proximity

to the smelters

Cost competitiveness to rise
further
Aluminum operating
cost

2007
2010
COMPARATIVE
PERFORMANCE MATRIX
NALCO and HINDALCO
 Comparative Performance
Matrix
NALCO – per unit realization HINDALCO – per unit realization

NALCO – TOTAL realization HINDALCO – TOTAL realization

Raw Material Consumption
HINDALCO – TOTAL realization NALCO – TOTAL realization

HINDALCO – per unit realization NALCO – per unit realization

CASH FLOW ANALYSIS
NALCO
 Share of Activities – Cash
Flows
Particulars 2006 2007 2008

Cash Flow from Operating 1965.42 2723.62 1901.91

Activities

Cash Flow from Investing -233.05 -641.94 -1544.13

Activities
Greater than 99% of the total contribution of the investment cash outfl

Cash Flow from Financing -293.87 -588.86 -527.85

Activities
Greater than 99% of the total contribution of the financing cash outf
 Cash Flow Ratios

Ratios Formula 2006 2007 2008

Cash Flow to Revenue CFO ÷ Net Revenue 0.41 0.46 0.38

Cash Return on Assets CFO ÷ Average Total Assets 0.29 0.32 0.19

Cash Return on Equity CFO ÷ Average Shareholder's 0.37 0.40 0.23

Equity
Cash to Income CFO ÷ Operating Income 0.76 0.75 0.83

Cash Flow Per Share (CFO - Preferred dividends) ÷ no. 30.50 42.27 29.52
of common shares outstanding

Reinvestment CFO ÷ Cash Paid for long term 8.43 4.24 1.23
Assets
Investing and Financing CFO ÷ Cash Outflows for 3.73 2.21 0.92
investing
financing Activities
VALUATION
NALCO
 Sales Revenue

•There has been a reduction in demand of

primary aluminium production worldwide
•
•This is also evident from the rising LME
inventories
•
•The per unit realization of the
aluminium producers has also declined
due to a fall in LME prices
 Demand Scenario
 Construction, Transportation and
Packaging account for about 65%
of the industry wise consumption


 Europe, North America and China

account for about 71% of the total
annual consumption


 Both the major contributors of

consumption have been facing a
slowdown
 Valuation Ratios
Ratios 2005-06 2006-07 2007-08

P/E 10.4 6.8 7.9

Price/book value 2.04 1.92 2.26
Price to cash earnings per share 6.12 5.43 10.54
EV/EBITDA 3.216 2.815 5.963
EV/Sales 2.02 1.87 3.32
Mkt Cap/ Sales 2.48 2.49 4.02
Dividend yield 1.57 2.56 1.69
Ratios 2005-06 2006-07 2007-08

P/E 10.4 6.7 13.9

Price/book value 1.369 1.4604 1.0334
price to cash earnings per share 6.05 5.45 4.97
EV/EBITDA 8.15 4.81 7.31
EV/Sales 2.09 1.14 1.5
Mkt Cap/ Sales 0.7732 0.7732 1.071438
Dividend yield 18.54 11.64 18.08
 Growth Phase
Year Dividend no . of DPS PV of Dividend
shares
2004     4  
2005     4  
2006     5  
2007     7 .5  
2008 386.6   6  
2009 319.9 644309628 5 4.4
2010 380.1 644309628 5 .9 4.7
2011 485.6 644309628 7 .5 5.3
2012     7 .8 14.4
 Continuing Value

Intrinsic Value = (7.8/(0.122 – 0.035)) =

•

89.7
•

=89.7 (1/1.122^4) = 56.6

•

Total Value = 14.4 + 56.6 = 71

•
 Valuation

Pessimistic Most Likely Optimistic

Discount Rate 12.4% 12.2% 12%

Growth Rate 3% 3.5% 4.5%

Growth Phase 14.4 14.4 14.5

Value
Terminal Value 51.7 56.6 66.7

TOTAL Value 66.1 71 81.2