MANAGEMENT DISCUSSION AND ANALYSISBusiness Overview:
FY 10 was a remarkable year on various counts. Today, as one looks back at the strongrecovery in the aftermath of an unprecedented sanguinary spell that befell us towards thesecond half of FY09, it appears to be a far better year than FY09. After reaching itsnadir in March 09, the commodity prices have recovered and the situation appears to be farbetter than it was around the same time last year.
And yet, if one compares full year FY10 with FY09, in FY09 average commodity priceswere almost the same or were higher than FY10 averages, a fact overlooked by many. Thisalso explains the velocity of decline and recovery, of commodity prices; a truly amazingphenomenon. Equally intriguing was the sharp fall in demand and subsequent demand recoveryinitially in the wake of Government’s stimulus measures and later on account ofgeneral improvement in the global demand, primarily led by the emerging markets.
Consolidated sales were Rs.60,722 crore in FY10 as compared with Rs.65,963 crore inFY09. Revenues were lower mainly due to lower aluminium prices and softness in theCompany’s end-markets in the first half of the year, especially for Novelis. Further,change in the status of Idea Cellular Ltd. from Joint Venture to Associate w.e.f from 1stJan 2009 for the purpose of consolidation, also resulted in proportionate revenue fromIdea not being included in the consolidated revenue.The PBIDTA stood at Rs.10,069 Crore ascompared with Rs.3,661 Crore in the previous year. This includes USD 578 million ofunrealized gains consisting of USD 504 million reversal of previously recognized lossesupon settlement of derivatives and USD 74 million of unrealized gains relating to mark tomarket adjustments on metal and currency derivatives at Novelis.
Aluminium business revenue fell by 11% to Rs.48,091 crore mainly due to lower LME; andlower demand in first half of the year. Earning before Interest turned around from a lossof Rs.425 crore to a profit of Rs.5,998 crore. This is significantly attributable to theremarkable results of Novelis.
The performance of the Aluminium business segment of standalone Hindalco during FY10was impacted due to lower average LME. Average LME was lower by around 16% than theprevious year. The demand for downstream value added products improved smartly in thesecond half and the sales volumes for the year were higher by 21% compared to previousyear.
Operational Highlights:
1. Highest ever aluminium production.
2. Highest ever downstream value added production leading to improved product mix.
3. Significantly higher sales in more lucrative domestic market.
4. Continuous reduction in conversion cost despite rising input cost pressures.
We continued producing more metal both through asset sweating and brownfield expansionof the Hirakud smelter and de-bottlenecking at Renukoot. We produced 555 KT of hot metalagainst 523 KT in the previous year. The Company recorded highest ever primary aluminiumproduction in this year . The turnover in the aluminium business declined by 8% to Rs.7,001 crore vis--vis Rs. 7,604 crore in the corresponding period in the previous yearwith decline in LME, even though the decline was partly offset through higher volumes.
To mitigate the impact of sharp fall in realizations several cost control initiativeswere successfully adopted. The increased proportion of Hirakud metal in our basket alsoenabled us to reduce blended cost of production.
The EBIT margin of our Aluminium business is amongst the highest relative to domesticand global peers which underlines our strategic thrust and commitment to combine costleadership and portfolio de-risking. As a result, our EBIT margin is relatively lessimpacted by LME compared to pure play aluminium companies.
FY10 was perhaps one of the most challenging years for Copper smelters worldwide. Thebusiness witnessed extreme price volatility in the aftermath of the economic meltdown,compounded by acute tightness in the concentrate market and unviable spot TCRC levels.While the benchmark TCRC’s were a healthy 75/7.5, the spot TCRC’s plummeted froma high of 90/9 in Jan, 09 to near zero by Q310 and remained well below the cash costs ofmost smelters for significant part of the year.
The Copper business significantly improved its underlying operating performance despitetightness in the concentrate market and escalating input costs. Copper business revenueincreased by 18% to Rs. 12,542 crore and EBIT doubled from Rs. 379 crore to Rs. 660 crore.
Novelis
Novelis witnessed a tremendous turnaround in the midst of challenging circumstances. Inan economy that was still emerging from recession Novelis reported record results. Recordadjusted EBITDA, record liquidity and record free cash flow. Novelis achieved these recordresults despite a 2% decrease in shipments Y-o-Y driven by soft market conditions in thefirst half of the year. Novelis’ sales declined due to decrease in the average LMEprices and 2% lower shipments.
Adjusted EBITDA increased by 55% Y-o-Y, reaching USD 754 Million. This was achieved onthe back of price increases negotiated in specific contracts across all regions andcost-out and restructuring initiatives that the company identified and implementedthroughout the year. Your Company also saw a dramatic improvement in liquidity over thepast year, liquidity surpassed USD 1 Billion driven by strong operational cash flow, thebond issuance and increased gross borrowing capacity under the ABL. Free cash flow wentfrom a negative USD 352 Million in FY09 to a positive USD 355 Million in FY10. This was adirect result of stronger performance, working capital management and controlled capexlevels.
The IT subsidiary of Novelis in Pune, Novelis India Infotech Ltd is now up and running.It is now catering to some of the IT and ERP requirements of Novelis globally.
Effective, 1st January, 2010, Novelis is no longer impacted by can priceceilings. In terms of continued cost savings, Novelis is taking a series of steps tostreamline and optimise the manufacturing operations in mature markets.
In response to the growing demand for its products in South America, the company isundertaking a major expansion in Brazil. The expansion will increase the plant’scapacity in Brazil by more than 50%.
Aditya Birla Minerals
Aditya Birla Minerals Limited, your Company’s Australian Subsidiary, reportedProfit after Tax of AUD 61.4 Million as against a loss of AUD 76.0 Million in the previousyear. Sustained cost management resulted in turnaround in financial performance. Theproduction was however; lower mainly due to loss of production of Copper in Concentrate atMt. Gordon and Cathode production at Nifty Oxide operations which were put under Care& Maintenance as a conscious management decision. The drop in overall production waspartly off-set by 13.8% increase in Nifty’s production of Copper in Concentrate.
Projects
Our projects continue to follow the strategic plan which we have set for ourselves. Thebenefits of brownfield expansions and earlier inorganic acquisitions have been the majorfactors which helped us tide over the challenging environment in FY10. We are working onfive greenfield sites in difficult terrain and uncertain regulatory environment. Site workon all greenfield projects has gained momentum and is in various stages of progress.
Business Reconstruction Reserve
Last year the Company formulated a scheme of financial restructuring to deal withvarious extraordinary costs associated with its organic and inorganic growth plan. Therecent economic downturn particularly in the commodity space is also expected to result inimpairment / diminution in value of certain assets/ investments. Accordingly, as per aScheme of Arrangement under Sections 391 to 394 of the Companies Act 1956 ("theScheme") between the Company and its equity shareholders approved by the High Courtof judicature of Bombay, a separate reserve account titled as Business ReconstructionReserve ("BRR") has been created by transferring balance standing to the creditof Securities Premium Account of the Company for adjustment of certain expenses asprescribed therein. This year no adjustment was made pertaining to standalone accounts inthis reserve and Rs. 304 Crore relating to interest and finance charges on loan taken byAV Minerals (Netherlands) B.V. was made for consolidated accounts, which has been suitablydisclosed.
Corporate
The standalone basic and diluted Earning per Share was at Rs.10.8 per share FY10 ascompared with Rs.14.8 per share in FY09.
Business Performance Review:
Aluminium Business
Aluminium Industry Review
Global economies recovered after an unprecedented sharp fall in FY09. The recovery wasequally spectacular but fraught with uncertainty and the average aluminium prices remainedlower than the FY09 averages.
The Indian economy showed its resilience in FY09 and staged a sharp recovery albeit onthe back of generous stimulus packages by the Government. In the aftermath of FY09meltdown and in the midst of uncertainty surrounding this recovery, many global majorswere forced to adapt to the dynamic conditions in an ad hoc manner and resorted toreactive actions in response to the challenges faced such as curtailing production,closing facilities and then re-starting some of these facilities when the situationimproved.
Your company on the other hand approached these adversities in a much steadier andcontrolled manner and was able to weather the storm much better. Not only did it performcredibly on the operational front but also ensured smooth and steady progress on thevarious Greenfield projects.
Demand and Market:
In CY 2009, the world aluminium consumption stood at around 34 Mn tonnes, a sharpdecline of over 8% from around 37.5 Mn tonnes consumption in CY 2008. The CY09 productionstood at 37.7 Mn tonnes against production of 40 Mn tonnes in CY 08.
After an abysmal first quarter, the growth rebounded in FY10 reaching around 36.3 Mntonnes, a growth of around 2.5%.
India on the other hand witnessed a smart recovery post a slow down in FY2009, as theGDP clawed back to 7.4% in FY10 from 6.7% in FY09. A sharp turnaround in the end usersegments such as automobiles, Industrial and infrastructure and thrust on power sectorgrowth propelled the aluminium industry growth. The improvement coupled with low baseeffect resulted in a strong 27.8% growth in domestic demand.
In FY10 LME aluminium prices staged a remarkable recovery to around USD 2,000 levelsafter touching lows of sub USD1400 in March 2009.
The depreciating rupee helped domestic aluminium producers partially as the prices aredollar denominated. The prices continued to rise even as inventory levels remained attheir historic highs. This was the result of tightness in the physical market, with mostinventories tied up at various ware houses under financing deals.
Aluminium continued to remain in contango taking more and more aluminium outside thephysical market as borrowing costs remain low and warehouses rent continued to beattractive.
Globally, Aluminium production increased as the producers restarted their capacitieswith the smart recovery in the aluminium LME. As a result the global markets continued tobe in surplus and global inventory increased to historical peaks.
The primary aluminium production for the year was around 40 Mn tonnes. China again ledthe production in 2009, producing around 14 Mn tonnes.
The cost of production of aluminium increased as input costs such as alumina and powersurged. Alumina costs increased as the aluminium prices recovered and bauxite qualitydeteriorated. For most producers power costs increased with sharp rise in coal/energyprices. The cost of other inputs such as CPC coke and anodes also increased in line withrecovery in the crude prices.
Operational Review
On this backdrop, your Company’s performance was commendable and its performancewas amongst the best performance in the industry.
The aluminium business operational performance was indeed exceptional and recordedhighest ever production of aluminium metal surpassing the record it achieved last year.
Alumina
We increased alumina production by 6% to 1.3 Mn tonnes primarily through productionramp up post expansion at Muri. We increased the higher paying domestic sale of specialsby 4%. Overall alumina sales volumes however, were almost flat on account of highercaptive consumption.
Primary Metal
Primary aluminium production increased to 555,404 MT up 6% over the previous year. Thisincrease in production growth was possible through brownfield expansion of Hirakud smelterfacility that led to 16% production growth from 134,301 Mt to 156,206 Mt and throughcontinued efforts to debottleneck the Renukoot capacity, which yielded around 10,000tonnes of incremental production.
Aluminium sales volumes increased in line with the production increase. However it wassales of value added products such as FRP and Extrusions that improved sharply.
Wire Rods
Wire rods production grew by over 23% from 74,968 MT in FY 09 to 91,903 MT. Theproduction was increased to cater to growing demand from power sector.
Value Added Products (VAP)
This remains the key focus area of your company to enhance profitability. This segmentsaw a sharp rebound with improved economic scenario.
The VAP (i.e. flat rolled products, extrusions and foils) volumes in tonnage improvedsignificantly compared to that of last year. The overall revenue though remained depressedon account of lower aluminium LME. The markup in the down stream business has shown acontinuous improvement over the years with continuous improvement in product mix as wellas geographical mix.
Flat Rolled Products
The FRP production increased to 205,265 MT, in line with the increasing domesticdemand, an increase of 13% over previous years. The export demand though remained subdued.
Extrusions
Extrusion segment demand also improved as the economy recovered. An improvement in thefortunes of housing and automobile sectors resulted in a demand increase for extrudedproducts. Extrusion production was higher at 38,909 MT in FY10 as compared with 35,895 MTin FY09. Extrusions sales volume increased 9% in FY10.
Financial Performance
The turnover of the aluminium domestic business declined by 8% to Rs. 7,001 Crorevis--vis Rs. 7,604 crore in the previous year, inspite of the highest ever metalvolumes, as average LME for the year was 16% lower than the previous year.
Earnings before interest and taxes (EBIT) declined by 18% to Rs. 1,767 Crore due topressure on realizations and the cost push. The costs push, was the result of increase incrude prices leading to some increase in crude derivative prices such as CP coke and fueloil. Coal prices also increased sharply. Aluminium producers across the globe experiencedpressure on EBIT margins The decline in the case of your Company was amongst the lowest inthe industry. This was possible primarily on account of higher production, sales volumesand superior product and geographic mix as discussed earlier.
The other cost management measures that helped in containing the fall in EBIT were :
• Improvement in operational efficiency in Power consumption, Carbon consumptionetc.
• Cost effective sourcing of key Raw materials.
The sustainability of your company’s profitability is reflected in healthy EBITmargins of 25% despite all the adversities.
Aluminium Outlook
In 2010, the global aluminium demand is expected to recover back to almost 39 Mn tonnesan improvement of almost 13% over 2009. The Chinese demand is expected to rise by almost18% after a relatively modest increase in 2009. The US demand is expected to recoversharply awhile Europe is expected to recover slowly. In India, the demand is expected toincrease at almost 14% with an improvement in Industrial activity and automobile growth.Over the medium term, thrust on power sector spending will spur the aluminium demand.
Aluminium production is expected to increase in line with the demand. The marketsurplus is going to continue for a while. With unprecedented demand destruction towardslater part of FY2009, the prices of aluminium had declined very sharply by over 50% inless than 4 months. The recovery has also been strong. As a result, many smelters that hadcurtailed production are again back in action. In addition some new smelters are on theverge of delivering.
The cost push has been felt in the recent times with rise in crude prices from therecent highs. Most input costs such as fuel oil, coal tar pitch have increased along withthe freight costs.
The prices are expected to continue to stay range bound over the short term with alarge inventory overhang. Aluminium inventories across the globe are near all time high.But most of these inventories are reportedly bound in financing deals and are not expectedto flood the market. The long term fundamentals are strong and the surplus is expected toreduce significantly by FY 10 end.
Business Outlook
Your Company has demonstrated its mettle in the wake of severe macroeconomicadversities. The ferocity and the velocity of the turmoil surprised the industry. But byleveraging its fundamental strengths and through robust business model your Company hasemerged stronger from the meltdown.
Your Company has adopted a consistent strategy to achieve global size and scale throughthe acquisition of Novelis. The de-risked business model of Novelis, where LME is a passthrough, its robust product portfolio with over 50% going into manufacture of beveragecans and strong presence in emerging markets has shown its strength in possibly worst ofthe times. This business complements your Company’s ongoing brownfield and greenfieldexpansion plans in the upstream aluminium business. This will also guard your Companyagainst the commodity meltdown in future.
Brownfield Expansions
• The expansion of Muri Alumina Refinery from 110,000 tpa to 450,000 tpa iscomplete.
• The Hirakud Smelter expansion from 143,000 tpa to 155,000 tpa is complete.Further expansion from 155,000 tonnes to 161,000 tonnes is under progress and is expectedto be completed by Q2 FY11.
• In Hirakud, work is on to expand the capacity further to 213,000 tonnes, throughaddition of 80 pots. We expect to complete this by Q4 FY 12.
• Further to the above, we are evaluating the possibility of expanding thesmelting capacity at Hirakud from the proposed 213 KTPA to 360 KTPA with correspondingincrease in back-up captive power from proposed 467.5 MW to 967.5 MW.
• Flat Rolled Products:
A project is underway for transfer of all key equipments for flat rolled products fromthe Novelis Plant at Rogerstone, UK to Hirakud. This will enable the company to produceCan Body Stock for local and export markets. The project is slated for completion in Q2 FY12. Dismantling activities are around 65 % completed. Many of the major orders forrefurbishment of existing equipment and procurement of new equipment have been placed.
Greenfield Projects
Greenfield Projects have made significant progress.
Utkal Alumina project: Construction of 1.5 Mio TPA Alumina refinery along with a 90 MWcaptive cogen plant is in full swing. The output from Utkal would be sufficient to feedalumina to the Mahan and the Aditya smelters. Engineering for Refinery and captive cogenplant is nearing completion. Contractors are working at site for civil & structuralwork and have mobilized more than 5000 people at site. Piling is 85% complete, fabricationand concreting are around 35% complete. Major equipment like Boilers, Evaporators &Turbines have started arriving at site. The erection and structural work for variousequipments is in progress. Orders for all the long delivery equipments placed. Around 82%of the project cost has already been committed.
The project team has estimated a total cost of Rs.5,600 crore without financing cost.The project commissioning is projected in Q2 FY12.
Sanctioned credit approvals from a consortium of banks for the entire debt requirementof the project have been obtained. The Common loan agreement was signed in July, 2010 andthe drawdown is expected soon.
Mahan Aluminium project: An 359 ktpa, Aluminium Smelter of capacity along with a 900 MWcaptive power plant is coming up in Bargwan, Madhya Pradesh.
All major approvals are in place and site activities are on track. Major contractorshave mobilized about 10,000 people at site. Three out of the six boilers &electrostatic precipitator foundations are complete. The powerhouse foundation work is inprogress. Two chimney rafts are complete. The erection of the engineering structure forboilers is in progress.
Around 82% of the total project cost has been committed. The project team has estimateda total cost of Rs.9,200 crore without financing cost. The project is expected to becommissioned in Q2FY12.
The Aditya Aluminium project: A 359 ktpa, Aluminium smelter along with a 900 MW captivepower plant, identical to the Mahan Project, is coming up in Orissa.
All major approvals are in place. Critical equipment orders have been placed for boththe smelter and the power plant. The site activities like area grading and boundary wallare on.
Around 59% of the total project cost has been committed. The project team has estimateda total cost of Rs.9,200 crore without the financing cost. The project commissioning isslated in Q3 FY12.
The Aditya Refinery Project: A 1.5 Mio TPA Alumina Refinery along with a 90 MW cogenplant, replica of the Utkal Alumina refinery is coming up in Orissa. The cost estimate inthe order of magnitude is Rs. 6,000 crore without financing cost. It is planned forcommissioning in Q1 FY14.
The Jharkhand Aluminium project: 359 ktpa, Aluminium smelter along with a 900 MWcaptive power plant is coming up in Sonahatu, Jharkhand. The land acquisition process hasalready begun. The process for obtaining environmental clearance has begun. To thateffect, a presentation has been made to the MOEF expert committee. The Tubed Coal Mine hasbeen allotted to the project jointly with Tata Power.
This project seeks to replicate the Aditya / Mahan smelter. The cost estimate in theorder of magnitude is Rs.10,000 crore without financing cost. It is planned forcommissioning in Q1 FY14.
The blueprint for a suitable financing plan for the projects is in place. Theseprojects will significantly enhance the scale of operations of your company. These willfurther improve the cost competitiveness of your Company and will firmly establish it asone of the lowest cost global alumina and aluminium producers.
To debottleneck and increase capacity, primarily in South America and Asia, Novelis hasincreased its capital expenditure plan by approximately USD150 Million or 148 percent forfiscal 2011 compared to the previous year. A significant amount is aimed at expanding itsrolling operations in Brazil. This investment will increase capacity by over 50 percentand better support the increasing demand for flat rolled products in the Regions. Theexpansion is expected to be completed by late 2012.
Copper Business Review
Industry Review
Global refined copper consumption declined second year on the trot in CY 2009. In last2 years, the decline has been from 18 Mn tonnes (CY 2007) to 16.7 Mn tonnes (CY 2009). Thedecline in CY 09 though was much lower than earlier anticipated. The production however,continued to remain reasonably strong declining to only 18 Mn tonnes resulting into asurplus.
However, China continued to import large quantities of copper through SRB purchases. Inthe last quarter of CY 09 and the first quarter of CY10, copper demand witnessed a sharprecovery. Globally refined copper consumption increased 13% in Q4 FY10 over the sameperiod last year, albeit on a low base. Projections suggest that world copper market islikely to remain in surplus in 2010, although at a much smaller surplus than in theprevious year. The copper price on LME has generally been firm, though it witnessed somedecline in the last few days due to increased risk aversion.
FY10 was perhaps one of the most challenging years for Copper smelters worldwide. Thebusiness witnessed extreme price volatility in the aftermath of the economic meltdown,compounded by acute tightness in the concentrate market and unviable spot TcRc levels.While the benchmark TcRc was a healthy 75/7.5, the spot TcRc’s plummeted from a highof 90/9 in Jan, 09 to near zero by Q3,09 and remained well below the cash costs ofsmelters for most part of the year. The situation got further aggravated by precipitousfall in sulphuric acid prices from a peak of $350/t in 2008 to -$25/t fob in FH- 2009 andsharp drop in fertilizer subsidies.
Company Performance:
The Copper business performed well despite adverse macroeconomic environment.
Your company recorded creditable production performance notwithstanding bi-annualshutdowns. Your Company also managed its market mix well to improve overall copperrealizations despite lower volumes.
Globally many Smelters were forced to cut back their output on account of Sulphuricacid evacuation problems. Global smelter capacity utilization, as a result, dropped by7-8% during the year, whereas our capacity utilization increased by 9% during the sameperiod. Your Company proactively seized a larger share of the shrinking pie of sulphuricacid demand through innovative supply chain interventions & aggressive pricing, thusnot letting our Smelters suffer on this count.
During the year significant improvements were achieved in operating performance. YourCompany delivered highest ever production of cathode-improvement of 12% over the previousyear. DAP volumes too were 7% higher than the pervious year.
The high point of operational performance was dramatic reduction in cost of productionthrough improvement in operational efficiencies and innovative optimization of inputenergy cost through use of alternative fuels (LNG and Petcoke).
In FY10, your Company delivered 30% reduction in cost of production over the previousyear.
Today Dahej ranks in top quartile of the Global cost competitiveness.
Financial
The sharp rise in LME coupled with higher sales volumes led to higher revenues, whichwere up by 18%. However, for custom smelters like your company, copper prices are just apass through and the margins are largely determined by Tc/Rc and as a result a decline inLME copper prices did not have significant impact on the profitability.
The favourable impact of higher contracted Tc/Rc was largely negated by lower productcontribution. However, operational improvements, better working capital management led todelivery of robust performance and improvement in cash flows.
Copper Outlook:
The global refined copper demand is expected to increase by around 5.5% in CY2010.Marginal recovery in western world consumption, with strong demand from emerging economiesnotably Asia and South America will keep overall demand buoyant. The US is showing earlysigns of recovery, while Europe after early promises is depicting some edginess.
The surplus will continue over short term, however with constrained supply from minesthe extent of surplus shall be lower than previous year. China will be a large determinantfor the market as has been the case in the recent past.
The long term Tc Rc contracts for the year were significantly lower than CY2009 due toconstrained mine supply and strong demand for refined copper.
The Spot Tc Rcs declined to historical lows driven by tight concentrate availability onaccount of delays in the expected new mine capacities, rising project costs and associatedrisk / socio-political factors. Higher capital costs, declining ore grades and labourrelated issues in some of the major copper producing countries are expected to restrictthe availability of concentrate and put further pressure on spot Tc Rcs.
Indian refined copper consumption is expected to increase sharply after a brief pauselast year. The annual consumption growth is expected to be around 9% with strong growth inpower, automobile and manufacturing sector. The long term fundamentals are strong and thecopper consumption is expected to increase with renewed thrust on power sector reforms andurban housing.
The copper consumption in India is relatively low. The per capita copper consumptionstands at around a Kg as compared to 7Kgs in the US or even 3.6 Kgs in China and hence thegrowth potential is enormous.
Business Outlook
Your Company has continued to perform creditably in the challenging times. It continuesto make steady progress on the planned growth track. Your Company will continue to striveto improve operating efficiencies and reduce conversion costs. Your Company’sproduction flexibility with respect to various value added byproducts will increase theavailable options for profit and cash flow improvements.
Financial Review and Analysis:
Share of Net Sales Value
Net Sales and Operating Revenues
Standalone Net Sales and Operating Revenues for the year 2009-10 increased by 7 % YOYto Rs. 19,536 Crore due to higher volumes and also on the back of higher copper LME, whilealuminium LME declined.
Consolidated revenues decreased from Rs. 65,963 crore to Rs. 60,722 crore, a drop of8%, primarily on account of weaker Aluminium LME and lower Novelis shipment volume.
Other Income
Standalone other Income at Rs. 260 Crore was sharply lower as compared to Rs. 637 Crorein the previous year largely due to lower treasury corpus post repayment of bridge loan inNovember 08 for Novelis acquisition and higher project spending. The yield was also lowerdue to lower interest rates on the short end of yield curve, which was largely due tohigher liquidity in the economy.
Interest
Your Company’s working capital requirement increased on account of higher copperprices due to higher LME. Softening interest rates resulted in lower average cost ofborrowing which also affected yields on the company’s investments which are mostly inliquid plans. It also reduced the cost of working capital borrowing. As a result theinterest and financing charges have reduced from Rs. 337 crore in FY09 to Rs. 278 crore inFY10.
Depreciation
Depreciation charges were at Rs. 667 crore in FY10 against Rs. 645 crore in FY09.
Taxes
The provision for tax was lower due to lower PBT and higher capitalization.
Profit
In the Aluminium business, lower Rupee LME eroded around Rs.750 crore. AdditionallyRs.100 crore was lost on account of the higher coal cost at Renusagar. Copper businesswhich benefited by higher contracted TcRc lost Rs. 750 crore on lower by-product credit interms of Sulphuric acid realisation and lower fertiliser subsidy. On this back drop NetProfit declined by 14% to Rs.1,916 Crore.
Due to early adoption of Accounting Standard (AS) 30 on Financial Instrument :Recognition and Measurement, the figures of the current period are not comparable with theprevious year.
Consolidated Profit stood at Rs. 3,925 Crore as compared to Rs. 484 Crore in theprevious year.
Consolidated result include Pre-tax adjustments for unrealised derivatives gain /(loss) of Rs. 2,736 Crore in FY10.
Cashflow Analysis:
| | | Rs. in Crore |
| Particulars | FY09 | FY10 | % |
| SOURCE OF CASH | | | |
| Cash from operations | 3,171 | 1,717 | 36% |
| Non-operating income | 691 | 322 | 7% |
| Equity Raised | 4,426 | 2,750 | 57% |
| Divestments of investments (Net) | 5,507 | | |
| Total | 13,795 | 4,789 | 100% |
| APPLICATION OF CASH | | | |
| Net capital expenditure | 967 | 2,619 | 48% |
| Investment in subsidiaries | 11,004 | 276 | 5% |
| Other investments (Net) | — | 1,501 | 27% |
| Net debt Outflows | 193 | 186 | 3% |
| Interest & Finance Charges | 669 | 641 | 12% |
| Dividend payout | 266 | 269 | 5% |
| Total | 13,099 | 5,492 | 100% |
| Increase / (Decrease) in Cash and Cash Equivalents | 696 | (703) | |
Sources of Cash
Cash from operations
Lower realisations for Aluminium and Lower TcRc affected cash profits and this coupledwith increase in working capital due to higher Copper LME towards end of fiscal resultedin lower cash flow from operations compared to last year.
Non-operating Income
Cash from non-operating income decreased to Rs. 322 crore as compared to Rs. 691 crorein last year. The decrease is on account of lower dividend and other income oninvestments. Average investments were lower due to liquidation of treasury investments inlast year for take-out of the bridge loan taken for Novelis acquisition and for capitalexpenditures.
Equity
Your Company raised Rs.2,750 crore (net of issue expenses) from issue of equity toqualified institutional investors to finance capital expenditure.
Application of Cash
Capital Expenditure
Your Company spent Rs. 2,619 crore on various expansion and efficiency improvementprojects. Going forward, this amount is slated to rise considerably as per plannedinvestments in Brownfield and Greenfield projects.
Investment in Subsidiaries (Net)
Aggregate Investments (net), including Loans & Advances to Subsidiaries, amountedto Rs. 276 crore.
Other Investments (Net)
Increase of Rs.1501 Crore in other investments (net) is mainly in short term treasuryinvestments. Treasury investments rose on account of issue of equity to qualifiedinstitutional investors.
Interest
Interest & Finance charges paid for the year was Rs.641 Crore, almost same as inlast year. Interest charged to profit and loss account is only Rs.278 crore on account ofinterest capitalized.
Dividend
Dividend paid including tax on dividend is Rs.269 Crore.
• We have put in place a strong capital structure to support our strategicbusiness plan. We successfully managed to raise USD 600 Mn through a QualifiedInstitutional Placement issuance; one of the largest QIP’s to hit the market in 2009.The price achieved was strong too, representing a discount of just 1.6% on the previousday’s closing share price. There was a very strong participation from long onlyinvestors and the stock traded up post the issuance. We managed to preserve our balancesheet strength to grow by reducing our leverage while doing so. With this we have largelytied up equity contribution for our green field expansion plans.
RISK MANAGEMENT
In addition to the risk and currency fluctuation inherent in its operations, yourcompany has got significant exposure to commodity prices. Hindalco’s financialperformance is significantly impacted by fluctuations in the prices of Aluminium Aluminaexchange rates and interest rates. The Company takes a very structured approach to theidentification and quantification of each such risk and has a comprehensive riskmanagement policy.
Clearly defined policies and management controls govern all risk management activities.Transactions in financial instruments for which there is no underlying exposure to thecompany are prohibited. All of the commodity, interest rate and foreign currency contractsare used to mitigate uncertainty and volatility and to cover underlying exposures.
Commodity Price Risk
Company’s commodity hedging activities can be divided into following:
• Timing mismatch risk: This is the price risk arising due to timing mismatch ofpurchases of copper concentrate, which is priced based on copper, gold and silver contentand sale of copper products, gold and silver. We use various spread risk management toolsto hedge this risk.
• Absolute price risk: We have price risk on aluminium that we produce. We usevarious derivative tools for hedging this risk from time to time.
Foreign Currency Exchange Risk
Exchange rate movements, particularly between the Indian Rupee (INR) and United StatesDollars (USD) have an impact on Hindalco’s cost and revenues. Since the company islong in USD (inflow greater than outflow), the company will benefit from weakening of theINR against USD and conversely, is disadvantaged if the rupee appreciates. In order tohedge this risk, your Company uses various tools such as foreign currency borrowings,currency forward and option contracts.
Interest Rate Risk
Your Company uses interest rate swaps to help maintain a strategic balance betweenfixed and floating-rate debts and to manage overall financing costs. Most of the long termloans are at fixed rate currently.
Project Execution Risk
Your Company is in the process of setting up 4 greenfield projects in difficultterrain. The project execution is contingent upon several external factors including butnot limited to land acquisition, project management skills, timely delivery of equipmentsetc. Any delay in these activities could result in change in implementation schedule andaffect the financial performance of the Company. Your Company is continuously monitoringthe progress to ensure that the implementation schedules are adhered.
Internal Control
A strong internal control culture is pervasive throughout our Group. Regular internalaudits at all our locations are undertaken to ensure that the highest standards ofinternal control are maintained. The effectiveness of a business’ internal controlenvironment is a component of senior management performance appraisals. The principal aimof the system of internal control
EMPOWERED PEOPLE EMPOWERED MINDS
At the heart of Hindalco’s precess and products, behind its growth and successlies the story of Team Hindalco. A multi-lingual, multi-cultural cross section of peoplebound by the same values and pursuing a common mission to create superior value for allstakeholders.
is the management of business risks, with a view to enhancing shareholders’ valueand safeguarding the Group’s assets. It provides a reasonable assurance on theinternal control environment and assurance against material misstatement or loss.
The Group operates a comprehensive annual planning, financial reporting and forecastingprocess. The Board formally approves a strategic plan and the annual budget. TheGroup’s performance is monitored against the budget on a monthly and quarterly basisby the Executive Committee; significant variances are reviewed. The audit observations arereported and discussed by the senior management and the important ones are also presentedto the Audit Committee of the Board. The audit observations are discussed and theappropriate feedback is conveyed to the relevant managers.
Arising from the announcement of the Institute of Chartered Accountants of India dated29th March, 2008 on Accounting for Derivatives, the Company has decided forearly adoption of Accounting Standard (AS) 30 on Financial Instruments : Recognition andMeasurement, in so far as it relates to derivative accounting, from 1st April,2009. In order to get reliable fair valuation and do accounting of different types ofderivative transactions which the Company enters into to mitigate certain financial risks,we have used one third party software of international repute. Besides its usefulness inthe area of derivative accounting, this software also has the capability to effectivelytake care of various tenets of hedge accounting. The resultant impact of early adoption ofthe AS and various disclosure requirements associated with derivative accounting have beendealt with elaborately in Notes on Accounts section of separate financial statements ofthe Company.
Material developments in human resources/ industrial relations front, including numberof people employed
In 2007, our Group was adjudged as the best employer in India by Hewitt. Our cultureand reputation as a business leader in the industry enables us to recruit and retain thebest available talent in India.
Human capital
Our professionals are our most important assets. We are committed to remaining amongthe industry’s leading employers. We have a pool of around 19,500 employees in ourfold. The group has a well laid talent development plan that ensures attracting the talentand provides for nurturing and enhancement of talent.
Training and Development
Our training, continuing education and career development programs are designed toensure that our professionals enhance their business skills. Our Group initiatives and ourlearning campus provide continuous learning opportunities. Our inhouse faculty conductsintegrated training for our new employees. Leadership development is a core part of ourtraining program.
Conclusion
To sum up the achievements in the financial year, your Company recorded a commendableperformance in a volatile year fraught with huge uncertainty in the financial andcommodity markets. This performance is testimony to the sound business models of ourAluminium and Copper businesses, the underlying strength of business operations andproject management capabilities, stable and capable processes, and successfulimplementation of a well thought out strategic plan for quantum growth supported by astrong balance sheet and robust cash flows from existing operations. The year alsowitnessed a dramatic turnaround at Novelis and ABML two contrasting businesses operatingin two entirely different geographies amidst different challenges.
With our business portfolio proving its mettle, we now have focused on timely executionof Greenfield projects that would further enhance our cost competitiveness and catapult usto a position of further strength.
Global economy is expected to revive slowly and overall growth could remain subdued.The upstream aluminium industry will continue to face pricing pressure on account of largeinventories and uncertain demand growth, while copper business will continue to facechallenges on account of poor concentrate availability and low TcRcs.
FY 11 will be a landmark year:
• We have strengthened our balance sheet and have reduced our leverage. This wouldallow us to progress smoothly on the Greenfield projects through a calibrated approach.
• The brownfield expansions at Muri and Hirakud have been commissioned and willdeliver the targeted cash flows to help finance our growth aspirations.
• We working on five greenfield sites in difficult terrain and have put in placethe necessary organization to keep these projects on track.
The key focus will be to:
• Maintain profitability in the uncertain macroeconomic environment.
• Maximise Free Cash Flow from existing operations.
• Leverage economies of scale and cutting edge technology in greenfield upstreamprojects and high-end downstream products.
• Your Company is progressing well to realise its aggressive growth plans.
These plans will enable your Company to grow in a steady and robust manner and continueto outperform the peers. Several cost reduction measures across the businesses and yourcompany’s inherent strengths will help us to sharpen its focus further and becomeeven more competitive in the near future.
Mumbai
Dated the 4th Day of June, 2010.
CAUTIONARY STATEMENT
Statements in this "Management’s Discussion and Analysis" describing theCompany’s objectives, projections, estimates, expectations or predictions may be"forward looking statements" within the meaning of applicable securities lawsand regulations. Actual results could differ materially from those expressed or implied.Important factors that could make a difference to the Company’s operations includeglobal and Indian demand supply conditions, finished goods prices, feedstock availabilityand prices, cyclical demand and pricing in the Company’s principal markets, changesin the Government regulations, tax regimes, economic developments within India and thecountries within which the Company conducts business and other factors such as litigationand labour negotiations. The Company assumes no responsibility to publicly amend, modifyor revise any forward looking statements, on the basis of any subsequent development,information or events or otherwise.