Mumbai: Hindalco Industries Ltd, the country’s largest aluminium maker, has decided to fund its future projects by pledging the assets and cash flows of subsidiaries that will own and execute these projects, a senior company executive said.
Slowdown heat: Hindalco’s Talukdar says margins are under pressure as they depend on revival of the North American market. Ashesh Shah / Mint
It needs about Rs25,000 crore by 2012 for its projects, but its ability to raise money is limited owing to the debt covenants it has with its lenders.
“Individual companies will borrow money without recourse to Hindalco. We will securitize future cash flows and assets with the lender to raise money,” Sunirmal Talukdar, Hindalco’s executive president and chief financial officer, said in an interview on Wednesday.
Cash receivables from the sale of goods will flow into an escrow (or meant for a specific purpose) account and lenders will have the first right on this, he explained.
Talukdar said the lenders have also insisted that the equity contribution to these projects be invested upfront or deposited in banks before they lend money.
Hindalco, which reported a 9% drop in revenue in the December quarter, said it is not using its balance sheet as it has to abide by three conditions, or covenants, set by its lenders when it borrowed $982 million (Rs4,900 crore today) to refinance part of the $3 billion bridge loan it had taken to buy US-based Novelis Inc. in 2007.
“Much of the problems are now behind us,” Talukdar said. The bridge loan was refinanced in November through a mix of secondary offer and loans worth $982 million from lenders.
The lenders had also laid down that Hindalco would maintain a debt-equity ratio of 1:1, would not lend to Novelis and maintain a fixed debt to operating profit.
Talukdar did not give details on the debt to operating profit ratio Hindalco has to maintain to honour the covenant, but admitted it’s facing pressure. “We have pressure on margins as it depends on the revival of North American markets,” he said.
The Aditya Birla Group’s flagship company has to complete three projects to meet its targeted 1.5 million tonnes (mt) of smelter capacity and 4-4.5mt of aluminium capacity.
Hindalco’s subsidiary Utkal Alumina Ltd needs Rs5,300 crore to complete its 1.5mt project by January 2011. The promoters have invested Rs750 crore in the project and lenders have committed Rs3,000 crore for it.
Hindalco’s aluminium project in Orissa, the largest of the three with an investment of Rs10,000 crore, includes a 1.5mt capacity alumina plant, a 365,000 tonne aluminium smelter and a 900MW power plant. The company has committed Rs1,264 crore for the project and plans to finalize orders for Rs3,000 crore.
Hindalco expects to complete the initial phase of the project by October 2011. The third project is Jharkhand Aluminium, which is slated to start producing aluminium by 2012.
The economic slowdown and depressed stock markets have restricted the ability of Indian companies to raise money from their operating units for expansion projects.
Aluminium makers have been forced to cut 13% of their output, or 5mt, while prices fell 56% to $1,485 per tonne in September, from $3,341 in April. Copper prices also slumped 55% to $3,000 a tonne from its peak because of slowing demand.
Novelis on Wednesday announced a $1.8 billion loss for the third quarter. The loss includes non-cash, pretax asset impairment charges of $1.5 billion and $472 million of unrealized losses on derivatives.