Baiju
Kalesh
Mint
16 June 2008
Hindalco Industries Ltd, the Aditya Birla Group’s
most profitable company, last year bought Novelis
Inc., the world’s largest aluminium can
maker, for $6 billion (Rs. 25,740 crore). Debu
Bhattacharya, Hindalco's Managing Director,
has transformed the company from a traditional metal
producer into an integrated company that sells cans
to beverage makers Coca-Cola Co. and PepsiCo Inc.
and aluminium sheets to aircraft builders Boeing
Co. and Airbus SAS. In an interview on Indian metal
makers’ quest to buy both mines and metal companies
abroad, Bhattacharya said commodity companies have
to invest in research and development to survive.
Edited excerpts:
Indian companies continue to buy mines and metal
companies even when commodities prices are riding
high. What has your experience been after Hindalco
purchased Novelis?
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Novelis
is a strategic fit for Hindalco. We wanted to grow
upstream (with value-added products) to ensure sustainable
profits. Producing primary metals (downstream) and
value added products are like chalk and cheese.
For
value-added products like cans, we needed to have
technology and customer acceptance. Neither can
be purchased from the market. Even
if we invest time and develop technology, there
is always a fear that it may not succeed.
We
have learnt many things from Novelis. We began with
cultural integration, followed by finance and technology,
and now marketing. For example, the energy efficiency
of their plants was far better than Hindalco’s.
No
steamroller approach will work in such cross-border
integration.
With
Novelis, Hindalco has spread across the globe
and our portfolio of products is a natural hedge
to the volatility of aluminium prices. We can
bring Novelis’ technology into India and
make cans and sheets for Indian consumers. The
benefits of the purchase have started to flow
in and will be reflected in our annual result.
There
is a belief that the global shortage of raw materials
(mines) is driving up metal prices. Indian companies
are, therefore, paying a scarcity premium to lock
up these assets. Do you believe so?
This is not entirely true. But,
the number of mines cannot keep going up because
these finite elements cannot be manufactured.
Low-cost
mines (with low quality of ore) are available on
the decline of the commodity cycle. Those with higher
quality (ores) will wait for the commodity cycle
to peak for a better price.
Nobody
buys mines as and when available. Valuation is
done for a longer horizon and today’s price
may not get translated after 10-15 years. Commodity
prices are high and, therefore, commodity companies
have the cash to buy such assets.
For
instance, take copper mines, which are scarce
in India. Nobody invests in a country; they invest
in an opportunity. The economic value of a mine
depends on many risk factors — political
and natural. How soon economically we can bring
back the raw materials and integrate them back
home is the challenge. Aditya
Birla Minerals, which owns two copper mines
in Mount Gordon and Nifty in Australia, sells
copper ore to Hindalco at market price. And Birla
Copper receives a consistent and cost effective
source of copper. We
have also learnt the mining business and that
knowledge is very useful. We have also locked
up reserves for next 10-12 years.
The
Chinese government has been a facilitator for their
domestic companies buying raw materials abroad.
There are reports of China offering to build infrastructure
such as rail networks, roads and ports in foreign
countries, in exchange digging out ores. Can the
Indian government, too, help local companies?
In a way, yes. China is a large economy that is
growing at a rapid pace. So, they need raw materials
to feed their plants. Their companies have strong
attachments to the government, which continuously
evaluates the market and changes policies to meet
the needs of the industry. I have no comments on
the Indian government’s role.
Novelis has a bridge loan of $3 billion. It has
to pay $1.4 billion to bond holders next year. Have
you thought of how to repay this?
We can always refinance it.
(Hindalco
is meeting on 20 June 2008 to consider a rights
issue of shares to refinance the bridge loan.
Long-term funds to replace the loan must be in
place by 10 November.)
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