Sample Case

Hindalco: The Novelis Acquisition

Author : Vishwanath S R

Length : 21 pages

Discipline : Finance

Description: The case documents a high profile cross border acquisition by an Indian

company. Students are required to assess the strategic motives of the firms and perform a

valuation analysis. Students learn the application of alternate valuation models.

Learning Objective: To introduce valuation issues in an acquisition

Subjects Covered: Financial Management, Mergers and Acquisitions

We look upon the Aluminum business as a core business that has enormous growth potential

in revenues and earnings. Our vision is to be a premium metals major, global in size and

reach with a passion for excellence. The acquisition of Novelis is a step in this directioni

Kumar Mangalam Birla, Chairman, Hindalco.

On May 15, 2007, Hindalco Industries Ltd announced the completion of its acquisition of

Novelisii. The transaction made the company the worlds largest Aluminum Rolled Products

Company, one of the largest producers of primary Aluminum in Asia, and India's leading

producer of copper. Novelis would operate as a subsidiary of Hindalco. The Company

entered into an agreement with Novelis on February 10, 2007 to acquire the Company in an

all-cash transaction that valued Novelis at approximately $6.0 billion. Under the terms of the

agreement, Novelis shareholders would receive $ 44.93 in cash for each outstanding common

share. Novelis shareholders approved the transaction at a special meeting on the May 10th

.

Hindalco was the flagship Company of the Aditya Birla Group, a multinational conglomerate

from India with annual revenues of $14billion and a market capitalization in excess of $23

billion.

The transaction was accomplished by way of a statutory plan of arrangement under the

Canadian law. The Company, through its wholly-owned subsidiary AV Metals Inc., acquired

75,415,536 common shares of Novelis, representing 100 percent of the issued and

outstanding common shares. Immediately after closing, AV Metals Inc. transferred the

common shares of Novelis to its wholly-owned subsidiary- AV Aluminum Inc. Upon closure

of the transaction, Novelis stock ceased trading on the New York Stock Exchange. De-listing on the New York Stock Exchange and the Toronto Stock Exchange were expected to

take place shortly thereafter.

Analysts and investing community were apprehensive about the transaction. Some analysts

wondered whether Hindalco was overpaying for the acquisition.

Background of the Aluminum Industry

Aluminum, a silvery white metal, was the most abundant metallic element in the earths crust and the most widely used non-ferrous metal. Aluminum did not occur in the metallic form in

nature. Bauxite was the principal Aluminum ore from which Aluminum was obtained.

Approximately 25% of the worlds Aluminum production came from recycling Aluminum scrap and rest 75% from primary production.

Its unique combination of properties like light weight, strength, flexibility, recyclability made

Aluminum ideal for a wide range of applications. Aluminum found a number of applications

in packaging (e.g. beverage cans), transport (e.g. aircraft manufacturing, alloy wheels),

electrical equipments, building and architecture (e.g. windows, roofing).

The price of primary Aluminum (ingots/billets) was market determined at LME (London

Metal Exchange) whereas the upstream products prices were determined by individual companies depending on the product quality. Prices of alumina were market determined but

not traded at LME. That is, alumina prices were based on the prices of Aluminum.

Historically Alumina traded at 13-15 percent of the price of Aluminum.

Overview of Domestic Aluminum Industry

Indias primary Aluminum industry was dominated by three companies that accounted for the entire production. They were: National Aluminum Company Ltd (NALCO), Hindalco

Industries Ltd. and Sterlite Industries Ltd1. Hindalco led the industry with a major share of

the production.

Two reasons were responsible for high concentration in this industry:

High Capital Requirement: The minimum economic size of an alumina refinery was around

1 million tonnes per annum and that of Aluminum smelter was 250,000 tonnes per annum.

Such size would require investment of over $1 billion each.

High Power Intensity: Aluminum smelting was energy intensive (1 tonne of Aluminum

required 14000-15000 kwh of power). An Aluminum manufacturer would require continuous

power supply. As a result, all companies had their own captive power plants. The captive

power plants added to the capital investment.

Novelis Backgroundiii

Novelis was the world leader in aluminum rolling, producing an estimated 19 percent of the

world's flat-rolled aluminum products. It was the largest producer of rolled products in

Europe and South America, and the second largest producer in both North America and Asia.

It produced Aluminum sheet and foil products for customers in high-value markets including

automotive, transportation, packaging, construction and printing. Its customers included

General Motors, Ford, Anheuser-Busch, Alcan, Kodak, Coca Cola among others. Novelis ten largest customers accounted for 40% of net sales in 2005.

Novelis was also the world leader in the recycling of used aluminum beverage cans.

Annually, it recycled around 35 billion used beverage cans. Novelis operated in 11 countries

with approximately 12,300 employees. Exhibits 1, 2, and 3 present Novelis financial

statements.

Hindalco Backgroundiv

Hindalco Industries Limited, the Mumbai based flagship company of the Aditya Birla Group,

was structured into two strategic businesses- Aluminum and Copper. Established in 1958,

Hindalco commissioned its Aluminum facility at Renukoot in the Indian state of Uttar

Pradesh in 1962. It had grown to become the country's largest integrated producer of

Aluminum and ranked in the top quartile of low cost producers in the world. Hindalcos stock was traded on the Bombay Stock Exchange, the National Stock Exchange of India Limited

and the Luxembourg Stock Exchange. A key aspect of Hindalco's strategy was continuous

growth. The Company had taken two major initiatives in this direction in the recent past. In

1999, the company acquired a 74.6 percent controlling stake in Indian Aluminum Co. Ltd.

(INDIAL), a leader in the alumina and semi-fabricated business. The second of the initiatives

was a brown-field expansion of facilities at a cost of Rs. 18b. The expansion added 100,000 1 The other producers of primary Aluminum included Indian Aluminum (Indal), which merged with Hindalco,

Bharat Aluminum (Balco) and Madras Aluminum (Malco), the erstwhile Public Sector Undertakings, were

acquired by Sterlite Industries

TPA to smelting capacity along with a 210,000 TPA increase in Alumina Refining Capacity

and matching augmentation of power generation capacity.

It enjoyed a domestic market share of 42 percent in primary Aluminum, 63 percent in rolled

products, 20 percent in extrusions, 44 percent in foils and 31 percent in wheels. Hindalco had

launched several brands like Aura for alloy wheels, Freshwrapp for kitchen foil and Ever Last

for roofing sheets in the recent years2. The copper plant produced copper cathodes,

continuous cast copper rods and precious metals like gold, silver and platinum group metal

mix. Sulphuric Acid, Phosphoric Acid, Di-Ammonium Phosphate, other Phosphatic fertilisers

and Phospho-Gypsum were also produced at this plant. Hindalco Industries Limited owned a

51 percent shareholding in Aditya Birla Minerals, which had mining and exploration

activities in Australia. The company owned two R&D centres at Belgaum, Karnataka and

Taloja, Maharashtra3.

Birla Copper, Hindalco's copper division, was situated in Dahej in the Bharuch district of

Gujarat. The copper unit at Dahej was the worlds largest, single location copper smelter with a smelting capacity at 0.5 m TPA. The plant was backed by captive power plants, oxygen

plants and by-product facilities for fertilizers and precious metals. A captive jetty with cargo-

handling capacity of over 4 m TPA facilitated easy import of copper concentrate and other

raw materials.

In addition, Hindalco held equity stakes in many companies like Idea Cellular, ABML

Australia, Aditya Birla Nuvo, Grasim, Bihar Caustic and Chemicals and NALCO4. Exhibits

4, 5, & 6 present Hindalcos financial statements

The Novelis Acquisition Opportunity

Novelis was formed as a result of the spin off from Alcan in January, 2005. In January 2005,

Novelis acquired the Aluminum rolled products business from Alcan. Novelis had a

conversion model i.e. it purchased Aluminum ingots (at LME) and converted them into rolled

products and sold these at certain margins. It enjoyed pass-through benefits. That is, it was

not affected by the volatility in LME prices as it sold its products at a spread over LME

prices. Raw material accounted for nearly 80% of its costs followed by labor and freight

(10%) and other costs.

Technological capabilities and meeting customer specification were key success factors in the

aluminum rolling industry. Technology was considerably capital intensive and setting up of a

plant took 3-4 years. Hence, Hindalco considered the acquisition of Novelis rather than

setting up in-house facilities. With this acquisition Hindalco would get access to the world

class technology and client base of Novelis.

With operations spread across 11 countries, Novelis had a broad client base. With proximity

to its clients, the company could save considerably on freight costs and cut down lead times. 2 Hindalco has since discontinued manufacturing alloy wheels

3 Hindalco had announced capacity expansion plans of Rs 250billion apart from the Novelis acquisition.

Agarwal, Swati, Hindalco Industries, Edelweiss India Equity Research, Mar 2007; Baji, Prasad, Hindalco

Industries, Edelweiss India Equity Research, Nov 2007 4 Analysts valued these holdings at Rs 51 per share. Shah, Chirag and Ritesh Shah, Hindalco Industries, IDFC

SSKI, Nov 2007

Apart from the reduction in costs, the merged entity could provide better sales support to

customers.

Since Hindalco had cheap supplies of bauxite and coal, the purchase of a downstream

producer like Novelis would provide the same benefits of other mega mergers like that of

Tata Steel and Corus Group.

On the flip side, Novelis had ended up inheriting a debt load of almost $2.9 billion on a

capital base of less than $500 m during the spin-off process. Though it marginally reduced

debt, it made some losses too. On a net worth of $322 m, Novelis had a debt of $2.33 billion

with a debt-equity ratio of 7.2.

In order to attract more business from soft drink manufacturers, Novelis promised four

customers that it would not increase product prices even if raw material prices went up

beyond a point5. Raw material prices shot up by 39 percent a few months after Novelis signed

those contracts. Novelis was forced to sell its products at lower prices than raw material costs

to these four customers. These four customers like Coca Cola and General Motors accounted

for 20 percent of Noveliss $9-billion revenues. The managements judgement led to losses of $350 million in 2006.

Structuring and Pricing a Deal

Financing Structure Hindalco was to acquire Novelis in an all-cash transaction, which

valued Novelis at approximately $6 billion, including $2.4 billion of debtv. Under the terms

of the agreement, Novelis shareholders would receive $44.93 in cash for each outstanding

common share at a 15 percent premium to the market price. AV Metals the A V Birla group's Canada-based special purpose vehicle (SPV) - would infuse $3.5 billion to finance

Hindalco's proposed acquisition. Putting aside the $2.4 billion debt burden of Novelis, the

cash component for financing the deal stood at $3.5 billion. Of this amount, AV Metals

would take loans worth $2.8 billion from three financial institutions, namely UBS, ABN

AMRO and Bank of America. This included a bridge loan of $1.4 billion at a coupon rate of

7.2 percent. These three institutions would underwrite the debt with UBS as the lead lender.

UBS would be the financial advisor to Hindalco. Essel Mining & Industries, a closely held

company of the group, would bring in $300 million while Hindalco would mobilize $ 450

million from its treasury operations.

Novelis already carried $2.4 billion of debt comprising of $1 billion term loans and $1.4

billion high-yield loans. The deal, of course, would increase the debt-equity ratio of

Hindalco.

Also, over 50 per cent of the group's business would come from operations outside India after

the acquisition. Exhibits 7 and 8 present the financing structure of the deal, financial market

data for India and the US and firm level data for Hindalco.

Strategy This acquisition was a good strategic move for Hindalco. Hindalco would be able to

ship primary Aluminum from India and make value-added products. Kumar Mangalam Birla,

Chairman of the Aditya Birla Group, said,

5 These contracts would expire at varying times till January 2010. Analysts at UBS Investment research

estimated the present value of these losses at Rs 21600 m. See Sachdev, Sunita, Hindalco Industries, UBS, Nov

2007

"The acquisition of Novelis is a landmark transaction for Hindalco and our Group. It is in

line with our long-term strategies of expanding our global presence across our various

businesses and is consistent with our vision of taking India to the world. The combination of

Hindalco and Novelis will establish a global integrated Aluminum producer with low-cost

alumina and Aluminum production facilities combined with high-end Aluminum rolled

product capabilities. The complementary expertise of both these companies will create and

provide a strong platform for sustainable growth and ongoing success."vi

Acting Chief Executive Officer of Novelis, Mr. Ed Blechschmidt, said,

"After careful consideration, the Board has unanimously agreed that this transaction with

Hindalco delivers outstanding value to Novelis shareholders. Hindalco is a strong, dynamic

company. The combination of Novelis' world-class rolling assets with Hindalco's growing

primary Aluminum operations and its downstream fabricating assets in the rapidly growing

Asian market is an exciting prospect. Hindalco's parent, the Aditya Birla Group, is one of the

largest and most respected business groups in India, with growing global activities and a

long-term business view."vii

Synergy Mr. Debu Bhattacharya, Managing Director of Hindalco and Director of Aditya

Birla Management Corporation Ltd., said,

"There are significant geographical market and product synergies. Novelis is the global

leader in Aluminum rolled products and Aluminum can recycling, with a global market share

of about 19 per cent. Hindalco has a 60 per cent share in the currently small but potentially

high-growth Indian market for rolled products. Hindalco's position as one of the lowest cost

producers of primary Aluminum in the world is leverageable into becoming a globally strong

player. The Novelis acquisition will give us immediate scale and a global footprint."viii

Novelis operated on a pure-converter model, which offered steady margins as pricing was

done either to pass-through costs or as a margin over metal. This assured steady cash flows, and, more importantly, the company had no LME price risk. In contrast, Hindalco

operated on a model with margins directly correlated with LME prices, with higher LME

prices translating into higher margins and vice versa. Hence, under an ideal scenario (without

the price ceiling contracts), Hindalco-Novelis would be in a superior proposition offering

stable cash flows. Further, Hindalco could leverage the same in emerging markets.

Analysts from Merrill Lynch, however, speculated that the costs could outweigh the benefits

of the deal6. They pointed out that margins would be sharply squeezed during periods of

rising Aluminum prices as selling prices of finished products do not increase

commensurately. For instance, price ceilings on beverage cans in the U.S. hurt Novelis

margins - in the first nine months of 2006 the company lost $ 170 million.

Stewart Spector, an Aluminum-industry consultant with offices in New York and Florida

echoed this view:

6 Luthra, Vandana, and Vishal Nathany, Hindalco Industries, Merrill Lynch, Mar 2007; Luthra, Vandana Hindalco Industries, Merrill Lynch, Sep 2007; Luthra, Vandana, and Bhaskar Basu, Hindalco Industries, Merrill

Lynch, Feb 2009

"In my opinion, they are overpaying. It seems to me that $6 billion is an awful big premium

to pay for a messy operation."ix

Exhibit 9 presents the consolidated free cash flow and dividend forecast for Hindalco. Exhibit

10 presents the valuation multiples of Aluminum and Copper Companies.

Demand Analysis

Domestic Indias consumption pattern of Aluminum was significantly different from the rest of the world. In India, Electrical sector was the major consumer of Aluminum (31%)

followed by the transport sector (18%) whereas internationally, transport (26%) and

packaging (20%) sectors dominated the consumption. The consumption pattern in India was

witnessing a shift from the Electrical sector to the transport sector. The demand from the

Electrical sector had come down from 52% in 1980-81 to 31% in 2004-05 whereas the

demand from the Transport sector had increased from 11% to 18% in the same period.

Going forward, Indias consumption pattern was also expected to be in line with the worlds consumption pattern as transport and packaging sectors were expected to become the demand

drivers for the Indian Aluminum industry.

India had been a net importer of Aluminum since 2005-06. With various projects lined up by

Indian companies analysts expected huge capacities to come up by 2010-11. India was

expected to be a net exporter from 2010-11 with the addition of new capacities. Analysts

expected a deficit of 0.05 m tonnes in 2006-07 and a surplus of 0.2 m tonnes in 2011-12.

Globalx

In a Ringsider article, analyst Adam Rowley of Macquarie Bank Ltd. estimated that the

global Aluminum consumption would increase by 7.5 percent to 34.3 million tonnes in 2006

whereas global production would increase by only 6.3 percent. He projected 2007

consumption to increase by 4.9 percent to 36 million tonnes and production to exceed

demand by 6 percent or 36 million tonnes.

The world Aluminum market had always maintained a tight demand/supply condition. A

considerable surplus was expected in 2010 and 2011 starting with a minimal deficit in 2009.

This was due to significant capacity additions worldwide, especially in Asian countries.

Analysts forecasted a surplus of 0.75 m tonnes in 2011 and expected Aluminum prices to

come down in the medium term.

Analysts expected world industrial production growth to remain above 4 per cent in the

following year. In Europe, a pick-up in investment spending and some ebbing of high

unemployment rates was expected to encourage domestic demand. The Japanese economy

was also likely to improve in 2008. The rapid pace of industrialization and urbanisation in

China, India and other emerging markets implied an increased consumption of Aluminum.

This was expected to support prices over the medium term. The Chinese demand for metals

like Aluminum had soared as these were a key input in construction, packaging and

automotive manufacturing. However, analysts were sceptical about the Chinese economy as

Foreign Direct Investment was slowing down.

The 16 countries that made up Central and Eastern Europe (CEE) included some of the

worlds fastest growing economies. Average GDP growth rate in the CEE was around 6 per cent per annum between 2002 and 2006. This trend was widely expected to continue in the

foreseeable future. With economic growth came a greater demand for metals and other

materials required to support industrial and infrastructure development. The region had also

attracted considerable foreign investment and key manufacturing industries had grown

rapidly.

Stock Market Reaction

Stock markets reacted negatively to the acquisition as investors considered the acquisition to

be a drain on Hindalcos profitability due to overvaluation and high leverage of Novelis7. That Novelis was a loss making company also worked against Hindalco. Stock price of

Novelis, on the other hand, jumped 15 percent on the New York Stock Exchange following

the news of the acquisition. Exhibits 11 and 12 present the stock price movements of both the

companies.

Upon the announcement of the deal, brokerage houses reacted in a variety of ways: Asit

Mehta Intermediates and UBS Investment Research gave a Buy recommendation; IL&FS Investmart gave an Accumulate recommendation; SSKI gave a Neutral recommendation; Edelweiss Capital gave a Reduce recommendation; Citigroup and Merrill Lynch gave a Sell recommendation.

7 Hindalcos stock traded at Rs 147 during May 2007. It actually increased marginally to Rs 148.85 upon

announcement.

Exhibit 1: Novelis Consolidated and combined statements of operations and

comprehensive Income (loss) for the year ended December 31 (in $ million)

Particulars ( In $ m except per share figures) 2006 2005 2004 2003

Net Sales 9849 8363 7755 6221

Cost of Goods Sold 9317 7570 6856 5482

Selling, general and administrative expenses 410 352 289 255

Litigation settlement net of insurance recoveries 0 40 0 0 Provision for depreciation and amortization 233 230 246 222

Research and development expenses 40 41 58 62

Restructuring Charges 19 10 20 8

Impairment Charges on long-lived assets 0 7 75 4

Interest expense and amortization of debt issuance costs net 206 194 48 33 Equity in net income of non-consolidated affiliates -16 -6 -6 -6

Other income net -82 -299 -62 -49 10127 8139 7524 6011

Income before provision for taxes on income, minority interests share and cumulative effect of accounting change

-278 224 231 210

Provision for taxes on income -4 107 166 50

Income before minority interests share and cumulative effect of accounting change

-274 117 65 160

Minority Interest's Share -1 -21 -10 -3

Net income before cumulative effect of accounting change -275 96 55 157

Cumulative effect of accounting change net of tax 0 -6 0 0 Net income -275 90 55 157

Other comprehensive income (loss)net of tax Currency translation adjustment 168 -155 30 102

change in fair value of effective portion of hedges - net -46 0 0 0

Change in minimum pension liability 12 -17 -26 1

Other comprehensive income (loss) net of tax 134 -172 4 103 Comprehensive income (loss) -141 -82 59 260

Earnings per share:

Basic: Net income before cumulative effect of accounting change 3.71 1.29 0.74 2.12

Cumulative effect of accounting change net of tax 0 -0.08 0 0 Net income per share basic -3.71 1.21 0.74 2.11 Diluted: Net income before cumulative effect of accounting change -3.71 1.29 0.74 2.12

Cumulative effect of accounting change net of tax 0 -0.08 0 0 Net income per share diluted -3.71 1.21 0.74 2.11 Dividends per common share 0.2 0.36 0 0

Supplemental information for 2005 only:

Net income attributable to the consolidated and combined results of

Novelis from

January 6 to December 31, 2005increase to Retained earnings 119 Net loss attributable to the combined results of Novelis from January 1

to January 5,

2005 decrease to Owners net investment -29 Net income 90

Source: Company Annual Reports

Exhibit 2: Novelis Consolidated Balance Sheet as on December 31(in $m)

Particulars 2006 2005 2004

ASSETS

Current assets

Cash and cash equivalents 73 100 31

Accounts receivable (net of allowances of $26 in 2005 and $33 in

2004)

third parties 1321 1098 770 related parties 21 33 798 Inventories 1391 1126 1226

Prepaid expenses and other current assets 42 66 36

Current portion of fair value of derivative contracts

third parties 106 194 22 related parties 0 0 134 Deferred income tax assets 9 8 0

Total current assets 2963 2627 3017

Property and equipment net 2143 2,160 2,347 Goodwill 236 211 256

Intangible assets net 20 21 27 Investment in and advances to non-consolidated affiliates 150 144 122

Fair value of derivative contracts net of current portion 44 90 3 Deferred income tax assets 76 21 12

Other long-term assets

third parties 101 131 66 related parties 59 71 104 Total assets 5792 5,476 5,954


Exhibit 2 (Continued)

LIABILITIES AND SHAREHOLDERS/INVESTED EQUITY

2006 2005 2004

Current liabilities

Current portion of long-term debt 144

third parties 3 1 related parties 0 290 Short-term borrowings 133

third parties 27 229 related parties 0 312 Accounts payable

third parties 1542 866 492 related parties 44 38 342 Accrued expenses and other current liabilities 508 641 425

Deferred income tax liabilities 61 26 1

Total current liabilities 2432 1,601 2,092

Long-term debt net of current portion third parties 2158 2,600 139 related parties 0 0 2307 Deferred income tax liabilities 81 186 249

Accrued post-retirement benefits 425 305 284

Other long-term liabilities 343 192 188

5439 4,884 5,259

Commitments and contingencies

Minority interests in equity of consolidated affiliates 158 159 140

Shareholders/invested equity Preferred stock, no par value; unlimited number of first

preferred and second preferred shares authorized; none

issued and outstanding

Common stock, no par value; unlimited number of shares

authorized; 74,005,649 shares issued and outstanding as of

December 31, 2005

Additional paid-in capital 398 425 0

Retained earnings -198 92 0

Accumulated other comprehensive income (loss) -5 -84 88

Owners net investment 0 0 467 Total shareholders/invested equity 195 433 555 Total liabilities and shareholders/invested equity 5792 5,476 5,954


Exhibit 3: Novelis, Consolidated and combined statements of Cash Flows (in $ million)

Particular 2006 2005 2004 2003

OPERATING ACTIVITIES

Net income -275 90 55 157

Adjustments to determine net cash provided by operating

activities:

Cumulative effect of accounting change net of tax 0 6 0 0 Depreciation and amortization 233 230 246 222

Net (gains) losses on change in fair market value of

derivatives

-63 -269 -69 -20

Litigation settlement net of insurance recoveries 0 40 0 0 Deferred income taxes -77 30 97 -20

Amortization of debt issuance costs 13 17 0 0

Provision for uncollectible accounts 4 3 6 4

Equity in net income of non-consolidated affiliates -16 -6 -6 -6

Dividends from non-consolidated affiliates 5 0 0 0

Minority interests share of net income 1 21 10 3 Impairment charges on long-lived assets 0 7 75 75

Stock-based compensation 9 3 2 2

Gain on sales of businesses and investments and assets net

-6 -17 -5 -28

Changes in assets and liabilities (net of effects from

acquisitions)

Accounts receivable

third parties -142 -91 -94 4 related parties 1 -1 72 190 Inventories -206 52 -144 -18

Prepaid expenses and other current assets 25 18 -4 -3

Other long-term assets 6 -13 -7 -28

Accounts payable

third parties 519 144 -7 34 related parties 4 2 40 -46 Accrued expenses and other current liabilities -64 167 -14 -63

Accrued post-retirement benefits -24 13 -42 43

Other long-term liabilities 69 -1 29 5

Other net 0 4 -32 8 Net cash provided by operating activities 16 449 208 444

INVESTING ACTIVITIES

Capital expenditures -116 -178 -165 -189

Disposal of Business-net -7

Proceeds from sales of assets 38 19 17 33

Changes to Investment in and advances to non-consolidated

affiliates

3 0 0 0

Proceeds from (advances on) loans receivable net third parties 0 19 0 0 related parties 37 374 874 -1210 Premiums paid to purchase derivative instruments -4 -57 0 0

Net proceeds from settlement of derivative instruments 242 148 0 0

Net cash provided by (used in) investing activities 193 325 726 -1377

Exhibit 3 Continued

2006 2005 2004 2003

FINANCING ACTIVITIES

Proceeds from issuance of new debt

third parties 41 2779 575 500 related parties 0 0 1561 471 Principal repayments

third parties -353 -1822 -993 0 related parties 0 -1180 -5 0 Short-term borrowingsnet third parties 103 -145 -774 577 related parties 0 -302 221 -29 Dividends common shareholders -15 -27 0 0 Dividends minority interests -15 -7 -4 0 Net receipts from (payments to) Alcan 5 72 -1512 -592

Debt issuance costs -11 -71 0 0

Proceeds from issuance of Common Stock in

connection with stock plans

2 0 0 0

Net cash provided by (used in) financing activities -243 -703 -931 927

Net increase (decrease) in cash and cash equivalents -34 71 3 -6

Effect of exchange rate changes on cash balances held

in foreign currencies

7 -2 1 2

Cash and cash equivalents beginning of year 100 31 27 31 Cash and cash equivalents end of year 73 100 31 27 Supplemental disclosures of cash flow information:

Interest paid 201 153 76 41

Income taxes paid 68 39 70 19

Principal payments on capital lease obligations

(included in principal repayments third parties) 3 3 0 0

Supplemental schedule of non-cash investing and

financing activities relating to the spin-off transaction

and post-closing adjustments

Other receivables 433

Short-term borrowingsrelated parties -57 Long-term debt related parties 32 Capital lease obligation 52

Additional paid-in capital -43 -109

Supplemental schedule of non-cash transaction

(Pechiney acquisition):

Assets 8 -197 -298

Liabilities 0 28 170

Net assets allocated to us from Alcan 8 -169 -128


Exhibit 4: Hindalco Consolidated Balance Sheet (in Rs ten m)

2004 2005 2006

SOURCES OF FUNDS:

Share Capital 141.29 141.59 147.38

Reserves Total 6908.95 7523.35 9238.33

Total Shareholders Funds 7050.24 7664.94 9385.71 Minority Interest 93.21 85.77 129.52

Secured Loans 2438.51 3231.01 3117.81

Unsecured Loans 1285.15 1699.8 3161.19

Total Debt 3723.66 4930.81 6279

Total Liabilities 10867.11 12681.52 15794.23

APPLICATION OF FUNDS:

Gross Block 10258.51 10953.17 13443.26

Less: Accumulated Depreciation 3041.28 3806.56 4495.77

Less: Impairment of Assets 0 99.93 104.38

Net Block 7217.23 7046.68 8843.11

Lease Adjustment 0 0 0

Capital Work in Progress 711.56 1638.69 1040.28

Investments 1865.57 2955.85 3163.21

Current Assets, Loans & Advances

Inventories 1703.37 2697.04 4497.54

Sundry Debtors 751.73 840.44 1305.66

Cash and Bank 283.12 473.05 1042.34

Loans and Advances 1039.53 941.59 1032.63

Total Current Assets 3777.75 4952.12 7878.17

Less: Current Liabilities and Provisions

Current Liabilities 1295.29 1881.23 2886.12

Provisions 233.94 909.85 1024.96

Total Current Liabilities 1529.23 2791.08 3911.08

Net Current Assets 2248.52 2161.04 3967.09

Miscellaneous Expenses not written off 19.49 13.5 8.68

Deferred Tax Assets 3.67 30.4 308.43

Deferred Tax Liability 1198.93 1164.64 1536.57

Net Deferred Tax -1195.26 -1134.24 -1228.14

Total Assets 10867.11 12681.52 15794.23

Contingent Liabilities 2065.02 831.85 1831.87


Exhibit 5: Hindalco Income Statement (in Rs ten m)

Particulars 2003 2004 2005 2006

Total income 5734.69 7064.82 10815.59 12772.55

Sales 5499.02 6821.23 10465.17 12485.92

Industrial sales 5497.29 6789 10408.02 12417.27

Income from non-financial services 1.73 32.23 57.15 68.65

Income from financial services 205.47 238.84 163.47 200.05

Interest 86.35 121.15 29.4 31.23

Dividends 39.61 37.88 79.43 108.7

Treasury operations 73.55 79.81 54.64 60.12

Other income 25.67 0 0 8.74

Prior period income & extraordinary income 4.53 4.75 186.95 77.84

Change in stock 23.68 101.94 255.65 1036.3

Total expenses 5176.23 6327.83 9741.88 12153.3

Raw material expenses 2522.68 3282.45 4900.53 6906.38

Purchase of finished goods 0 0 17.13 20.42

Power, fuel & water charges 666.46 935.7 1534.79 1820.32

Compensation to employees 297.46 325.27 419.19 593.18

Indirect taxes 518.17 614.09 960.44 1091.09

Royalties, technical know-how fees, etc. 14.56 1.08 4.12 30.89

Lease rent & other rent 22.37 15.14 12.31 15.13

Repairs & maintenance 43.4 56.72 113.55 195.08

Insurance premium paid 30.99 33.53 36.5 38.57

Outsourced mfg. jobs (incl. job works, etc.) 7.96 24.87 84.81 87.5

Outsourced professional jobs 0.63 0.67 0.97 1.12

Directors' fees 0.03 0.03 0.04 0.04

Selling & distribution expenses 165.7 142.51 238.85 249.62

Travel expenses 18.15 20.84 31.31 32.96

Miscellaneous expenses 82.36 69.37 116.52 124.74

Fee based financial service expenses 0.77 2.19 0 28.97

Treasury operations expenses 146.73 0 10.59 77.58

Total provisions 0.53 0.48 3.2 5.22

Write-offs 6.5 0.01 0.38 0.92

Less: Expenses capitalised 78.19 21.24 56.42 42.86

Less: DRE & expenses charged to others 73.62 86.71 4.88 295.71

Prior period & extraordinary expenses 16.67 0.18 9.1 5.22

Interest paid 178.59 186.46 199.2 200.09

Financial charges on instruments 0.12 0 0 0

Expenses incurred on raising deposits/debts 1.29 0 0 0

Depreciation 268.67 317.45 463.26 516.68

Amortisation 0 0 0 0

Provision for direct taxes 317.25 406.74 646.39 450.15

PAT 582.14 838.93 1329.36 1655.55


Exhibit 6: Hindalco Cash Flow Statement (in Rs ten m)

Particulars 2003 2004 2005 2006

Net cash flow from operating activities (indirect

method)

903.72 1112.87 1760.93 711.36

Net profit before tax & extra ordinary income 1062.70 1245.67 1913.29 2107.13

Operating cash flow before working capital

changes

1275.84 1515.17 2292.83 2616.58

Cash flow generated from operations 1200.57 1271.79 1704.99 1008.07

Cash flow before extraordinary items 882.57 1112.87 1704.99 711.25

Net cash inflow/(outflow) from investment activities -1318.81 -1165.97 -2008.94 -1327.99

Net cash inflow/ (outflow) from financing activities 222.95 -99.78 396.12 1128.78

Net cash inflow/(outflow) due to net

increase/(decrease) in cash & cash equivalents

-192.14 -152.88 148.11 512.15

Cash flow -- opening balance 657.85 444.56 291.67 439.78

Cash flow -- closing balance 465.71 291.68 439.78 951.93


Exhibit 7: Financing Structure of the deal ($m)

Number of shares (m) 7 4.7

Price per share ($) 44.93

EV 6216

Debt 2860

Equity value 3356

Financed by:

Bridge finance for 18 months 2906

Equity/ preferred stock/other securities

in wholly owned subsidiary 450

Total 3356

Exhibit 8: Financial Market Data India and US

India US

10 Year T Bond Rate 7 % 3.24 %

Market Risk Premium 9 % 7.5 %

Hindalco

Beta 1.15

Debt/Capital 0.39

Tax rate 34%

Average cost of debt 7.4%8

Exhibit 9: Consolidated Free Cash Flow Forecast for Hindalco (Rs m)

2007 2008 2009 2010 2011

Operating Cash Flow 39,607 46,417 50,601 39,648 53,433

Working Capital Changes (5347) 7582 (46,834) 31,443 (10,542)

Capital Expenditure (21,905) (27,507) (22,647) (50,368) (19,306)

Free Cash Flow 12,354 26,493 18,881 20,723 23,585

Number of Shares m 1111

Source: India Daily, Kotak Institutional Equities, Feb 2009 and June 2009

Free Cash Flow/Share Rs 11.99 (131.47) 7.47 2.35 (0.297)

Dividend / Share Rs 1.67 1.8 1.9 2.0

Source: Luthra, Vandana, and Vishal Nathany, Hindalco Industries, Merrill Lynch, Mar 2007; Luthra, Vandana Hindalco Industries, Merrill Lynch, Sep 2007; Luthra, Vandana, and Bhaskar Basu, Hindalco Industries, Merrill

Lynch, Feb 2009

8 This was the prevailing yield on 10 year AAA rated corporate bonds in 2006-07

Exhibit 10: Valuation multiples of Aluminum and Copper Companies

EV/EBITDA

Peers 2008E 2009E

2008E 2009E

International Aluminum Companies

Alcoa Inc 6.54 6.41

Century Aluminum Company 5.46 5.29

Aluminum Corp of China Ltd-H 19.07 18.31

Antofagasta plc 5.05 6.49

Vedanta Resources Plc 5.19 4.50

Average 8.26 8.20

Indian Aluminum Company

National Aluminum Co Ltd 8.52 8.68

Copper Companies

Hunan non-ferrous metals-H 9.72 10.87

Jiangxi Copper Company Ltd-H 15.75 17.10

Southern copper corp 6.83 7.87

Freeport-Mcmoran copper 4.41 5.01

Xstrata plc 6.91 7.41

Average 8.72 9.65

Source: Mehta, Chintan, Hindalco Industries Ltd, Asit C Mehta Intermediates, Dec 31, 2007

Exhibit 11: Stock Price History of Hindalco (Bombay stock Exchange)

Source: Yahoo Finance

Exhibit 12: Stock Price History of Novelis (NYSE)

Source: www.stockcharts.com

References

1. Agarwal, Swati, Hindalco Industries, Edelweiss India Equity Research, Mar 2007 2. Baji, Prasad, Hindalco Industries, Edelweiss India Equity Research, Nov 2007 3. Brebner, Daniel et al, Hindalco Industries, UBS, Mar 2008 4. Daga, Giriraj, Hindalco Industries Ltd: Hindalco-Novelis Merger Update, Khandwalla

Securities, Feb 14, 2007

5. Energy Management Policy Guidelines for Energy Intensive Industry of India, Chapter 3, pp 13-36 by Bureau of Energy Efficiency

6. Heather Timmons, "Indian Metals Company to Buy Canadian Rival," International Herald Tribune, Feb 11, 2007

7. Hunt, Brook, The Long Term Outlook for Aluminum, Brook Hunt and Associates Ltd. 2007

8. India Daily, Kotak Institutional Equities, Feb 2009 9. India Daily, Kotak Institutional Equities, June 2009 10. Iyengar, Suresh P "Hindalco Deal May Not Impact Aluminum Prices," The Hindu

Business Line, February 13, 2007

11. Kuvelkar, Hitesh, Hindalco Industries, First Global Research, May 2009 12. Luthra, Vandana, and Vishal Nathany, Hindalco Industries, Merrill Lynch, Mar 2007 13. Luthra, Vandana Hindalco Industries, Merrill Lynch, Sep 2007 14. Luthra, Vandana, and Bhaskar Basu, Hindalco Industries, Merrill Lynch, Feb 2009 15. Mahtani, Pradeep and Raashi Chopra, Hindalco Industries, Citigroup Global Markets

Equity Research, March 2007

16. Mehta, Chintan, Hindalco Industries Ltd, Asit C Mehta Intermediates, Dec 31, 2007 17. Mishra, Vishal, and Sameer Dalal, Hindalco Industries, Il&FS Investsmart, May 2007 18. Sachdev, Sunita, Hindalco Industries, UBS, Nov 2007 19. Shah, Chirag, Hindalco Industries, SSKI, May 2007 20. Shah, Chirag and Ritesh Shah, Hindalco Industries, IDFC SSKI, Nov 2007 21. Surojit Chatterjee, "Birla's Hindalco Buys Aluminum Giant Novelis for US $6.4

billion," International Business Times, Feb 13, 2007

Endnotes

i Hindalco Press Release, May 15, 2007

http://www.hindalco.com/media/press_releases/200705may/novelis_subsidiary_hindalco.htm accessed on

July 1, 2009

ii Hindalco Press Release, 16th May 2007

http://www.hindalco.com/media/press_releases/200705may/novelis_subsidiary_hindalco.htm accessed on

July 1, 2009

iii www.novelis.com http://www.novelis.com/Internet/en-US/AboutUs/ accessed on July 1, 2009

iv www.hindalco.com http://www.hindalco.com/about_us/overview.htm accessed on July 1, 2009

v Hindalco Press Release, 11 February 2007.

http://www.hindalco.com/media/press_releases/200702feb/hindalco_and_novelis.htm accessed on July 1,

2009

vi Hindalco Press Release, February 11, 2007

http://www.hindalco.com/media/press_releases/200702feb/hindalco_and_novelis.htm

vii Hindalco Press Release, February 11, 2007


viii Hindalco Press Release, February 11, 2007


ix Hindalco Press release, May 16, 2007


x The Ringsider Metal 2007, The London Metal Exchange

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