Aluminum industry, which is highly capital intensive and scale sensitive depends on two major variable cost components viz. alumina and power. Bauxite from which alumina is obtained, being a bulk commodity, has forced companies to be concentrated near bauxite deposits.

The major companies in the Indian Aluminium industry are Hindalco, NALCO, BALCO and Indal with Hindalco having the largest manufacturing capacity in the industry.

In the Aluminium industry, the takeover of Indal by Hindalco on 23rd March 2000 has taken the corporate sector by surprise. Both the companies, which were major competitors, suddenly came onto a single platform to share each other’s resources. The selling of Alcan’s stake in Indal at Rs.190 to Hindalco came as more of a surprise since the same stake had been acquired by Alcan at Rs.200 per share in March 1998 as a counter offer to Sterlite Industries hostile bid.

Indal was a 55% subsidiary of ALCAN (Canada). The company is India's largest producer of fabricated aluminium and a dominant player in the special grade alumina market. Among the products manufactured by the company are chemicals, sheet, foil and packaging and extrusions. Indal’s performance in the industry traditionally has been proportional to the demand growth in consumer durable, packaging and construction industries.

In the late 1990s, Hindalco became the largest competitor to Indal, after Hindalco announced its aggressive plans to foray into value-added products. It expected value added semi fabricated products to contribute 75% of Hindalco’s turnover by 2001. INDAL had therefore decided to increase its focus on the specialty chemical business where it has been globally competitive. It had plans to increase its exports of alumina chemical in the long run.

Indal has focussed on the production of alumina as against aluminium and had an expertise in the production of special grade alumina. Indal is a net importer of aluminium for its downstream operations. The company gets aluminium (for its downstream operations) from outside vendors under contract manufacturing or by importing. This has exposed its operational efficiency to the volatility in exchange rates. A depreciation in the value of the rupee (which is more likely) will increase the cost of imports, thus hurting margins.

The Rs.2,004.76-crore Hindalco Industries Ltd. is the leading player in the aluminum industry, and is one of the lowest cost producers of primary aluminum in the world. It is the largest integrated producer in the country with captive bauxite mines, power units, and high value added output comprising semi- fabricated aluminum products and down stream production facilities.

In order to add value, Hindalco has added and modernized downstream capacities. Company has plans to go in for a brownfield expansion at the existing location at Renukoot. Hindalco is blending bauxite transported from Madhya Pradesh (MP), but the inferior quality of this bauxite is expected to affect production efficiency and yields.

And if the company revives its plans to set up a new greenfield plant, it will entail substantial capital cost and would also increase the risk profile of the company. The funding for this project could also result in equity dilution.

With Hindalco’s plans of entering into downstream range, the merger is expected to give an advantage to the company. Hindalco was metal-surplus and marginally alumina-deficient, while Indal was alumina-surplus with downstream facilities. Besides, Indal’s special grade alumina is three times costlier than normal alumina and has high export potential. The acquisition will be instrumental in the creation of an integrated aluminum manufacturing facility in the entire value chain of the industry.

Though Hindalco needs to raise funds for its acquisition, Hindalco’s, plans of entering into downstream sections can be easily catered by Indal after the merger.

Demand for aluminium is expected to be strong in both the domestic and world markets. The first signs of revival of the Japanese economy and a continuing strong growth in the US and European economies would translate into higher demand for the white metal in the global market. With no major smelters coming up, the demand-supply situation is also expected to remain favorable. In the last five months international prices have increased from U$1,176 per ton to U$1,500 per ton. And domestic metal price has improved from Rs 76,750 per tonne in February 1999 to Rs 84,100 per tonne in September 1999.

Domestic demand at 650,000 tonnes is currently dominated by the electrical sector. In the long term, growth of the packaged good sectors and higher penetration in automobile manufacturing, would result in strong demand growth for aluminum. Also the government spending in the electrical transmission segment would boost demand for aluminum. Aluminium demand is expected to grow around 4% annually over the next 4-5 years.

With all the above influencing factors on the aluminium, both the companies are expected to gain with the merger. The EPS of Hindalco was Rs.76 in 1999 compared to Rs.14 for Indal. However, analysts expected that both the shareholders would benefit from the merger with the synergy to the companies. As for the aluminum industry, mergers and acquisitions have come to stay.