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ALUMINIUM INDUSTRY ANALYSIS
Prof. Sanjeev Patkar
VALUE CHAIN ANALYSIS
VALUE CHAIN ANALYSIS
Mining of the Basic Raw Materials
(Bauxite, Caustic Soda, petro coke, coal tar, LS/FS furnace oil)
Alumina
Aluminum1.Primary aluminum, such as molten metal, re-melt ingot and sheet ingot. It is made from the electrolysis of alumina
2.Recycled aluminum
Upstream ProcessesDownstream
Processes
Alumina is then reduced to aluminium
through the electrolytic process. It
is also known as aluminium smelting
Bauxite is refined to alumina by mixing it with caustic liquor
These are the residual processess such as annealing, coating, leveling or slitting to achieve the desired thicknesses and metal properties.
There are 2 processes from where the aluminium products can be manufactured:1.Sheet Ingot – that require sheet ingot, a rectangular slab of aluminium as a starter material
2.Continuous casting mills – that convert molten metal directly into semi finished sheet
The finished products can be divided into 3 broad categories.
Aluminium rolled productsExtrusions FoilsRedrawn rods
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
100 units of bauxite will give me 33 units of alumina which in turn will give 18 units of aluminium
PORTER’S 5 FORCE MODEL
Porter’s Five Force Model
Bargaining Power of Suppliers
Raw Materials
Bauxite(which is a ore
containing aluminium)
Power(Petro Coke, LS/FS
Furnace Oil, Coal Tar)
Alumina(this is used as a raw
material for downstream
aluminium producers)
Bargaining Power of the Suppliers - Bauxite
Bauxite contributes significantly in the cost of production
Abundant Bauxite Reserves
Presence of captive Bauxite MinesIndia has 3bln
tonnes of Bauxite reserves which
account for 6% of world reserves
The contribution of Bauxite to the cost of production is the second highest after
power
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 costs
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
Bauxite Mining
Alumina/ Power
Aluminium
Semi – fabricatio
nFabrication
Cost Leadership
Access to cheap resourcesEnhance Scale
Improve Efficiency
The company is enhancing its scale, using its captive resources to become one of the lowest cost producers of aluminium in the world
Sizeable Global Presence
2004-05
2005-06
2006-07
2007-08
0
200000
400000
600000
800000
1000000
1200000
1400000
Domestic Sales (MT)Export Sales (MT)
A sizeable proportion of NALCO’s sales are from the overseas markets
NALCO 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 furtherCost of power=U S cent 1.25per unitNew cost of power using captive coal=0.75cent per unitSavings=0.5 cents per unitPower consumption=16000KwhCost reduction =0.5*16000 =USD 80 per tonne
Aluminum operating cost
2007 2010
COMPARATIVE PERFORMANCE MATRIX
NALCO and HINDALCO
Comparative Performance Matrix
2004-05 2005-06 2006-07 2007-080
20000
40000
60000
80000
100000
120000
140000
per MT realiza-tion Aluminium Products Hin-dalco
per MT realiza-tion Alumina Hindalco
2004-05 2005-06 2006-07 2007-080%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Total Aluminium Products Sold (MT)Total Alumina sold (MT)
2004-05
2005-06
2006-07
2007-08
020000400006000080000
100000120000140000160000180000
per unit realization AluminiumProducts NALCOper unit realization Alumina NALCO
2004-05
2005-06
2006-07
2007-08
0%10%20%30%40%50%60%70%80%90%
100%
Total Alumina Sold NALCO (MT)Total Alumina Sold NALCO (MT)
NALCO – per unit realization HINDALCO – per unit realization
NALCO – TOTAL realization HINDALCO – TOTAL realization
Raw Material Consumption
2005 2006 2007 20080%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Crystal growth modi-fierLimeAluminium fluorideC.T.PitchC.P.CokeCaustic soda
2005 2006 2007 20080%
10%20%30%40%50%60%70%80%90%
100%
Crystal growth mod-ifierLimeAluminium fluorideC.T.PitchC.P.CokeCaustic soda
2004-05
2005-06
2006-07
2007-08
0%10%20%30%40%50%60%70%80%90%
100%Pitch
Ammonia
Rock Phosphate
Calcined Petroleum Coke
Caustic Soda
Aluminium Fluoride
Aluminium
Bauxite (including cost of own produc-tion)
2004-05
2005-06
2006-07
2007-08
0%10%20%30%40%50%60%70%80%90%
100% Pitch
Ammonia
Rock Phosphate
Calcined Petroleum Coke
Caustic Soda
Aluminium Fluoride
Aluminium
Bauxite (including cost of own produc-tion)
NALCO – per unit realization
HINDALCO – TOTAL realization
HINDALCO – per unit realization
NALCO – TOTAL realization
CASH FLOW ANALYSIS
NALCO
Share of Activities – Cash Flows
Particulars 2006 2007 2008
Cash Flow from Operating Activities
1965.42
2723.62
1901.91
Cash Flow from Investing Activities
-233.05
-641.94
-1544.1
3
Cash Flow from Financing Activities
-293.87
-588.86 -527.85
Greater than 99% of the total contribution
of the investment cash outflows are
from the purchase of Fixed Assets
Greater than 99% of the total contribution of the financing cash outflows are from the payment of Dividends
Cash Flow Ratios
Ratios Formula 2006 2007 2008
Cash Flow to Revenue CFO ÷ Net Revenue 0.41 0.46 0.38
Cash Return on AssetsCFO ÷ Average Total Assets 0.29 0.32 0.19
Cash Return on Equity CFO ÷ Average Shareholder's Equity 0.37 0.40 0.23
Cash to Income CFO ÷ Operating Income 0.76 0.75 0.83
Cash Flow Per Share(CFO - Preferred dividends) ÷ no. of common shares outstanding
30.50 42.27 29.52
Reinvestment CFO ÷ Cash Paid for long term Assets 8.43 4.24 1.23
Investing and Financing
CFO ÷ Cash Outflows for investingfinancing Activities
3.73 2.21 0.92
VALUATION
NALCO
Sales Revenue
1,600
1,700
1,800
1,900
2,000
2,100
2,200
2,300
Primary Alu-minium Produc-tion
0
500
1000
1500
2000
2500
Alu-minium LME In-vento-ries
Thousands o
f M
T
•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
28%
22%15%
12%
10%
9%
4%
Transport
Construction
Packaging
Electrical
Engineering
Consumer Durables
Others
21%
17%
33%
20%
9%
Europe (Ex Russia)North AmericaChinaAsia (Ex China)Rest of the World
48%
25%
9%
2%
2%
1%
2%
11%
Chalco Chinese Small Aluminium Pro-ducersOther Global
ProducerAlcoa
Vimetco United RusalVedanta Norsk Hydro
Valuation Ratios
Ratios2005-06 2006-07
2007-08
P/E 10.4 6.8 7.9Price/book value 2.04 1.92 2.26Price to cash earnings per share 6.12 5.43 10.54EV/EBITDA 3.216 2.815 5.963EV/Sales 2.02 1.87 3.32Mkt Cap/ Sales 2.48 2.49 4.02Dividend yield 1.57 2.56 1.69
Ratios2005-06 2006-07
2007-08
P/E 10.4 6.7 13.9Price/book value 1.369 1.4604 1.0334price to cash earnings per share 6.05 5.45 4.97EV/EBITDA 8.15 4.81 7.31EV/Sales 2.09 1.14 1.5
Mkt Cap/ Sales 0.7732 0.77321.07143
8Dividend yield 18.54 11.64 18.08
Growth Phase
Year Dividendno. of shares DPS PV of Dividend
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 Value 14.4 14.4 14.5
Terminal Value 51.7 56.6 66.7
TOTAL Value 66.1 71 81.2