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2010

“CAPITAL
BUDGETING”
-: A PROJECT REPORT
“Capital Budgeting Tools and
analysis of Capital
Expenditures in Hindalco
Industries limited”.

Arati pradhan
ANSAL INSITIUTE OF TECHNOLOGY
GURGAON
6/30/2010

A project report
ON

―Capital Budgeting Tools and Analysis of Capital
Expenditures in Hindalco Industries Limited‖

Guided by: submitted by:

Mr. Vimal Raheja Arati Pradhan
Manger (finance & Accounts) MBA (finance)
Hindalco Industries Limited Sem - 3rd
Ansal Institiute of Technology,Gurgaon

HINDALCO INDUSTRIES LIMITED Page 2

ACKNOWLEDGEMENT

In an organization, be one man working in isolation

can achieve it an industry, a school, no outcomes. It’s always a

group working and achieving in totality. It is the outcome of all the

guidance and support that I received from this organization.

I would like to thank Mr. Ajay Joshi, Vice President

(fin. and A/Cs) for giving me a chance to work with this

organization and for extending words of encouragement and

wisdom.

I would like to thanks Mr. Vimal Raheja , Manager

(Finance and Accounts). His valuable guidance and constant

encouragement have helped me tremendously in the completion

of this project.


I would also like to extend a word of gratitude to

Mr.S.K.Das, General Manager (T &D) for having arranged my

training in this organization.

At last but not the least I would like to thanks

members of the finance and Accounts department for making

available all resources required for the completion of this project

report.

To sum up, my experience with HINDALCO has

been a valuable one. The value addition was enormous and the

impact, long lasting. I thank everyone once again.


PREFACE


The summer training is an integral part of curriculum. During the training, a
student Gets an opportunity to understand the Practical aspect of theory. Training
makes the concept clear.

The project report is the outcome of the summer training that I have undergone

Hindalco Industries Limited for the partial fulfillment of MBA programmer.

The topic allotted by the company to me is

“CAPITAL BUDGETING TOOLS AND ANALYSIS OF
CAPITAL EXPENDITURES IN HINDALCO INDUSTRIES
LIMITED.”
I have tried my level best to make a good report. However, no one
can claim for Perfection entirely. So I apologize for the discrepancy, if any crept
in.

Preparation of project requires perseverance, initiatives, proper
guidance and direction.

So it is mandatory to take the aid of various departments.

Actually a project is a summarized form of the following seven activities:

- Planning

- Resource collection

- Organizing

- Joint efforts

- Efficiency

- Communication

- Transparency

DECLARATION


I hereby declare that this project titled

“CAPITAL BUDGETING TOOLS AND ANALYSIS OF CAPITAL

EXPENDITURES IN HINDALCO INDUSRIES LIMITED.” has

been conducted in the territory of hindalco industries Ltd.

Renukoot, Sonebhadra. It is my own and original work. This is a

project report submitted in partial fulfillment of the degree course

of “MBA”. It has never been submitted not published anywhere

else before.

The above statement is true to the best of my knowledge.

DATE : Arati Pradhan

MBA (FINANCE)

Ansal institute of technology

GURGAON


TABLE OF CONTENT

PART-a
* Aditya Vikram Birla Group Overview

* Introduction to Industry

* Introduction to Hindalco

* Business Outlook of Hindalco

* Risk Management

* Conclusion

* Facts File

Part –B
* Objective of the study

* Research methodology

* Project report and data analysis

* Findings and suggestion

* Limitation of the study

* Conclusion

* Bibliography


GROUP OVERVIEW
The Aditya Birla group is India‘s first truly
multinational corporation with global in vision and rooted in Indian
values. The Group is driven by a performance ethic pegged on
value creation for its multiple stakeholders. A us $ 29.2 billion
conglomerate, with a market capitalization of us $ 25 billion. An
extraordinary force of 130,000 employees belonging to 30
different nationalities anchors it. Over 50% of its revenue flow of
its operations across the world. The group‘s products and
services, offer distinctive consumer solutions. Its 72 state-of-the-
art manufacturing units and sectoral service span throughout the
India, Thailand, Indonesia, Egypt, Malaysia, Australia and china.

OUR BRAND
The name ―Aditya Birla‖ evokes all that is positive in
business and in life. It typifies integrity, quality, performance,
perfection and above all, character. Our corporate logo, ‗The
Rising sun‘, symbolizes these traits. (‗Aditya‘ is the Hindi word for
sun).
The logo consists of an inner circle, symbolizing the
internal universe of the Aditya Birla Group, an outer circle,
symbolizing the external universe, and a dynamic meeting of rays
converging and diverging between the two.


SALUTE TO THE SUN
Aditya vandana, our Group‘s corporate anthem is a
sequel to our corporate logo. The beautiful sanskrit hymm extols
the greatness of the sun and its never ending journey towards
excellence.

IN CUBATING TALENT
Nurturing future leaders was of deep interest to our
founder Aditya Vikram Birla .To commemorate his memory and to
build on his legacy, we have instituted the Aditya Birla
scholarships scheme. Under this scheme, some of the brightest
scholars entering select Indian Institutes of Management ,Indian
Institues of Technology and Birla Institutes of Technology, pilani
are groomed to become outstanding leaders.

OUR VISION
“To actively contribute to the social and economic
development of the communities in which we operate. In so
doing, bulid a better, sustainable way of life for the weaker
sections of society and raise the country’s human
development index.
---Mrs. Rajashree Birla , chairperson, Aditya Birla centre for
community Initiatives and Rural Development.


INCUBATING TALENT
Nurturing future leaders was of deep interest to our
founder Aditya vikram Birla. To commemorate his memory and to
build on his legacy, we have instituted the Aditya birla
scholarships scheme. Under this scheme, some of the brightest
scholars entering select Indian Institues of technology and the
Birla institute of technology, pilani are groomed to become
outstanding leaders.

Our vision

“ To actively contribute to the social and economic development
of the communities in which we operarte.In so doing, build a
better, sustainable way of life for the weaker sections of society
and raise the country’s human development index.”

--Mrs. Rajashree Birla,chairperson, Aditya Birla Centre for

community Initiatives and Rural development.


GLOBAL VISION AND INDIAN VALUES

The Aditya Birla Group is india‘s first multinational
corporation. Global in vision,rooted in Indian values, the group is
driven by a performance ethic pegged on value creation for its
multiple stakeholders. A us$29.2 bilion conglomerate, with a
market capitalization of us$14 bilion, it is anchored by an
extraordinary force of 72,000 employees belonging to over 30
different nationalities. Over 30% of its revenues flow from its
operations across the world. The Group‘s produts and services
offer distinctive customer solutions. Its 72 state-of-art
manufacturing units and sectoral services span India.Thailand,
Indonesia, Malaysia, Philippines, Egypt, Canada, australia, and
china.

A premium conglomerate, the Aditya birla group
is a dominant player in all of the sectors in which it operates. Such
as viscose staple fibre, non- ferrous metals, cement, viscose
filament yarn branded apparel, carbon black , chemicals,
fertilizers, sponge iron, insulators and financial services.


OUR PRODUCTS AND BRANDS

KEY BUSINESS OF THE GROUP:-

SECTORS COMPANY UNITS IN INDIA AND
OVERSEAS AT
Non-ferrous Hindalco Renukoot-Alumina Refinery,
metals Semelter and fabricated products.
Silvassa- Foils,Alloy Wheels

Renusagar-Thermal based captive

Power Plant(Cpp)

Hirakud-Smelter & Cpp

Belgaum & Muri- Alumina Refineries

Kalwa- Foils

Belur, Taloja- Sheet rolling

Alupuram- Extrusions

Jharkhand, Chhatisgarh,
Maharashtra Bauxite mines
Dahej- Copper, di-ammonium
phosphate and precious metals
Birla Minerals Australia- Copper mines
Pt.Ltd.
Indal Kollur-Foil rolling


Globally the aditya birla group is :
>: A metals powerhouse, among the world‘s most cost-
efficient aluminium and copper producers. Hindalco-Novelis is the
largest aluminium rolling company. It is one of the three biggest
poducers of primary aluminium in Asia, with the largest single
location copper smelter.

>: No. 1 in viscose staple fibre.

>: The 4th largest producer of insulators.

>: The 4th largest producer of carbon black.

>: The 11th largest cement producer globally, the 7th largest In
asia and the 2nd largest in India.

>: Among the world‘s top 15 BPO companies and among
India‘s top four.

>: Among the best energy efficient fertilizer plants.

In India the Aditya Birla Group is:
>: A premier branded garents player.

>: The second largest player in viscose filament yarm.


>: The second largest in the chlor-alkali sectors.

>: Among the top five mobile telephony companies.

>: A leading player in life insurance and assest management.

>: Among the top three supermarket chains in the retail
business.

Beyond Business—The Aditya Birla Group is
>: Working in 3700 villages.

>: Reaching out to seven million people annually
through the Aditya Birla centre for community initiatives
and rural development, spearheaded by Mrs. Rajashree
Birla.

>: Focusing on healthcare, education, sustainable
livehood, infrastructure and espousing social causes.

>: Running 41 schools and 18 hospitals.

>: Transcending the conventional barriers of business
to send out a message that ―WE CARE‖.


HINDALCO
An industry
leader in aluminium and copper, Hindalco Industries Limited, the
metals flagship company of the Aditya Birla Group is the world's
largest aluminium rolling company and one of the biggest
producers of primary aluminium in Asia. A metals powerhouse
with a turnover Rs 18856.30 crore. Its copper smelter is the
world‘s largest custom smelter at a single location.
Established in 1958, we commissioned our
aluminium facility at Renukoot in eastern Uttar Pradesh, India in
1962. Later acquisitions and mergers, with Indal, Birla Copper
and the Nifty and Mt. Gordon copper mines in Australia,
strengthened our position in value-added alumina, aluminium and
copper products.
The growth story for Aditya Birla Group‘s flagship
company, Hindalco, will remain inherently Indian. After posting
impressive numbers, that saw its consolidated net profit soaring
eight-fold to Rs 485 crore for the year ended March 31, Hindalco‘s
management said they expect domestic demand to post a double-
digit growth in the current financial year. However, the rise in
North America and Europe will be modest.
Global aluminium demands fell about 8 per cent
in 2009, after the global slowdown hit demand — especially for
raw materials — in the automotive and construction sectors. But,


there is a clear pickup, with demand likely to rise close to 14
Percent in 2010, as China and India see rapid expansion in their
economies.
Aluminium demand in India is very positive
because of auto, construction and power sectors. Even globally, I
would be very surprised if aluminium prices come down from the
current levels,‖ managing director Debu Bhattacharya told
reporters. ―Copper demand, too, is rising on the back of power
projects.‖
Hindalco gets about 40% of its India revenue
from aluminium, and is trebling capacity in India to 1.9 million
tonnes by 2013 at a cost of about $5 billion. ―Financial closures of
all the three greenfield projects are on track. In fact, we have
invested Rs 5,000crore already on the projects, as we are
strongly committed to them. We raised Rs 2,700crore from our
QIP to meet any shortfall in equity funding. As of now, I see no
requirement for any more equity funding,‖ said Sunirmal Talukdar,
group executive president & chief financial officer, Hindalco.
Novelis , has seen a remarkable turnaround with
its adjusted Ebitda (earnings before interest, depreciation, tax and
amortisation) up 55 per cent in FY10 compared to the previous
year. The improved numbers and profitability have been a result
of right sizing operations and higher efficiency management and
exploring new applications for Aluminium rolled product maker
Novelis, which Hindalco acquired in 2007, will primarily see
growth in the South American and Asian markets. Novelis will be
investing $150 million in 2010-11 on capital expenditure.
significant chunk of that will be going into expanding rolling


operations in Brazil, which is likely to get completed by late
2012.Aluminium in sectors like auto.Cost-saving exercises also
helped. Novelis for example recycled 40 billion tonnes of used
beverage cans (UBCs) in 2009, saving significant energy costs.

Board of Directors

Non-Executive directors:-
Mr. kumar Mangalam Birla (Chairman)
Mr. Rajashree Birla
Mr. A.K. Agarwal
Mr. E.B Desai
Mr. S.S. Kothari
Mr. C.M Maniar
Mr. M.M Bhagat
Mr. K.N. Bhandari
Mr. N.J. Jhaveri

EXECUTIVE DIRECTOR:
Mr. D. Bhattacharya


CHIEF FINANCIAL OFFICER:
Mr. S. Talukdar, group executive president and CFO

ALUMINIUM BUSINESS:
Mr. D.K.Kholly, chief operating officer (aluminium and power
renukoot)
Mr. S.M. Bhatia, president (foil and wheat)
Mr. S.K.Mudgal, chief marketing officer

COPPER BUSINESS:
Mr. B.M. Sharma, chief marketing officer
Mr. J.P.Paliwal, joint Executive president
Mr.N.M.Patnaik, joint president (finance and commercial)

COMPANY SECRETARY:
Mr. Anil Malik


Hindalco overview
History of our company and other corporate matters
Our company is a flagship company of the Aditya Birla Group and
was incorpation on December 15, 1958 as Hindustan Aluminium
Corporation Limited under the provisions of the Act. We changed
our name from Hindustan Aluminium corporation Limited to
Hindalco Industries Limited on October 9,1989, as we had
expanded our line of products and also proposed to diversify into
allied fields including aluminium foils, steel plant etc. The Equity
shares of our company with face value of Rs.10 each were first
listed of BSE. The listing agreement was signed with BSE on
January 28, 1960. Thereafter, the Equity Shares with Face value
of Rs.10 each were listed on the NSE.
In 1962 we set up collaboration with Kaiser
Aluminium and chemicals Corporation, USA when our integrated
Complex at Renukoot came on stream with a smelter capacity of
20,000 MTPA. It has since grown to become the largest
integrated aluminium producer in India with a smelting capacity of
Renusagar power company Ltd.
The company has grown manifold and is
managed by board of directors, with Mr. Kumar Mangalam Birla
as the chairman of the board of Directors. Day to day affairs of the
company is managed by professional executives headed by Mr
Ratan K. Shah as the chief Operating Officer.
The dream of the visionary GD Birla to locate
an aluminium plant near Rihand powerhouse comes true. The late
Prime Minister, PT. JAWHERLAL NEHRU formally inaugurated
the plant in January 1963. Going round the extensive work, Pandit
ji saw his dream of a brighter feature of India take shape before


his eyes.From the modest beginning giant with a capacity to
produce 345000 tons of aluminium per annum.

Aluminium and Power (Renukoot, U.P.) the company has sales
and distribution network that covers all India and includes five
sales offices located in Mumbai, Delhi,Bangalore,Chennai,Uttar
pradesh.

Hindalco business

Hindalco in India enjoys a leadership position in
aluminium. The company‘s aluminium units across the country
encompass the entire gamut of operations from bauxite mining
alumina refining, aluminium smelting to downstream rolling,
extrusion, foils and alloy wheels , along with captive power plants
and coal mines.
The company has significant market share in the
entire segment in which it operates. It enjoys a domestic market
share 42 % in primary aluminium, 63 %in rolled product , 20 % in
extrusion,44%in foils and 31%in wheel.
As step towards expanding the market for value added
products and sevices. Hindalco has launched sevelar brands in
recent years, which include Aura for Alloy wheel, fresh rapper for
kitchen foil and ever last for roofing sheets. Our exclusive
showroom, the aluminium gallery, seeks to promote Hindalco


products to its customers. It is a platform for the company to
showcase quality audience in an appropriate ambience. The
exhibits include products to a quality audience in an appropriate
ambience. The exhibits include products like windows, doors,
furniture, ladder, roofing sheets and ceiling and cladding panels.
Hindalco products are well received not only in
the domestic markets, but also in the international market. The
company‘s metal is accepted for delivery under the high grade
aluminium contract on the London Metal Exchange (LME). The
company export about 17% of its total sales volume of aluminum.
The company‘s alumina chemical business is a leader in
manufacturing and marketing of specialty alumina and alumina
hydrate products in the country. It has a market share of 90% in
the country. These specialty products find wide usage in
diversified industries including water treatment chemicals,
refractory, ceramics, cryolite, glass, filler and plastic, conveyor
belts and cables among others. The company also exports these
alumna chemical to over 30 country covering North American,
Western, Europe and the Asian region.

ALUMINIUM MANUFACTURING IN HINDALCO

Hindalco was among the first few alloy
wheels companies to have obtained the ISO/TS 16949


certification to meet the stringent standard in specialty alumina,
primary aluminium and downstream products. A part from being a
dominant player in the domestic market, Hindalco‘s products as
well accepted in international markets. Exports account for more
than 30% of total sales.
Hindalco‘s major products include standard
and specialty grade alumina and hydrates, aluminium ingots,
billets,wire rods, flat rolled products, extrusions, foil and alloys
wheels. Hindalco is the world‘s largest aluminium rolling company
and one of the biggest producers of primary aluminium in Asia. In
India, Hindalco enjoys a ledership position in specialty alumina,
primary aluminium and downstream products.
Hindalco‘s major products include standard
and specialty grade alumina and hydrates aluminium ingots,
billets, wire rods, flat rolled products, extrusions, foil and alloy
wheels.
The integrated facility at Renukoot (uttar
pradesh) houses an alumina refinery and an aluminium smelter
along with facilities for production of semi-fabricated products,
namely, redraw rods, flat rolled products and extrusions. The
plant is backed by a co-generation plant a 742 mw captive
powerplant at Renusagar to ensure continuous and consistent
supply of power for smelter and other operations.

# UTKAL ALUMINA INTERNATIONAL LIMITED, ORISSA
A Rs 44 billion( $1 billion) greenfield joint venture with Alcan Inc,
of canada in which Hindalco holds 55% equity. The proposed 1.5
million tonne alumina refinery is to be set up in Doragurha,


Rayagada district of Orissa, sourcing bauxite from the rich
reserves of Baplimali Rayagada.

# MADHYA PRADESH
A Rs.77 billion($1.7 billion) project for a smelter-power complex in
the siddhi district of madhya pradesh Aluminium smelter capacity
of 325,000 tpa supported by a 750 mw coal based captive power
plant. The coal for the power plant will be sourced from Mahan
coal company Ltd., a joint venture between Hindalco and Essar
Group for mining of coal from the Mahan coal block.

# JHARKHAND
A Rs. 78 billion ($1.7 billion) project for a smelter- power complex
in the latehar district. Aluminium smelter capacity of 325,000tpa
supported by captive thermal power of 750 mw.


Bauxite mines
Power station
E Extrusion plant
s Alumina Smelter
R Alumina Refinery

R R

s
F R s

W F
F
J
s
R

s
E

Copper
Aluminu
smelter Foils Extrusio Alumina Rolling Wheels Bauxite Power Coal
m
,refinery plant n plant refinery mill plant mines station mines
smelter
& jetty

s R B 24
s F E R W


PRODUCTS PERFORMANCE REVIEW

Hindalco is one of the leading producers of aluminium
and copper. Our aluminium units across the globe encompass the entire
gamut of operations, from bauxite mining, alumina refining and aluminium
smelting to downstream rolling, extrusions, foils, along with captive power
plants and coal mines.

Our copper unit, Birla Copper, produces copper
cathodes, continuous cast copper rods and other by-products, such as
gold, silver and DAP fertilisers.

Our units are ISO 9001:2000, ISO 14001:2004 and
OHSAS 18001 certified. Several units have gone a step further with an

integrated management system (IMS), combining ISO 9001, ISO 14001
and OHSAS 18001 into one business excellence model. We have been
accorded the Star Trading House status in India. Hindalco's aluminium
metal is accepted for delivery under the High Grade Aluminium Contract on
the London Metal Exchange (LME). Our copper quality standards are also
internationally recognised and registered on the LME with Grade A
accreditation.

Aluminium

Hindalco's major products include standard and
speciality grade aluminas and hydrates, aluminium ingots, billets, wire rods,
flat rolled products, extrusions and foil.


The integrated facility at Renukoot houses an alumina refinery and
an aluminium smelter, along with facilities for the production of semi-
fabricated products, namely, redraw rods, flat rolled products and
extrusions. The plant is backed by a co-generation power unit and a 742
MW captive power plant at Renusagar to ensure the continuous supply of
power for smelter and other operations.

A strong presence across the value chain and synergies
between operations has given us a dominant share in the value-added

products market. As a step towards expanding the market for value-added
products and services, we have launched various brands in recent years —
Everlast roofing sheets, Freshwrapp kitchen foil and Freshpakk semi-rigid
containers.

COPPER

Birla Copper, Hindalco‘s copper unit, is located at
Dahej in Gujarat, India. The unit has the unique distinction of being the
largest single-location copper smelter in the world. The smelter uses state-
of-the-art technology and has a capacity of 500,000 tpa.

Birla Copper also produces precious metals, fertilisers and sulphuric and
phosphoric acid. The unit has captive power plants for continuous power
generation and a captive jetty to facilitate logistics and transportation.

Birla Copper upholds its longstanding reputation for quality copper
cathodes and continuous cast copper rods by assuring its management


processes meet the highest standards. It has acquired certifications such
as ISO-9001:2000 (Quality Management Systems), ISO-14001:2004

(Environmental Management System) and OHSAS-18001:2007
(Occupational Health and Safety Management Systems).

Mines

Hindalco acquired two Australian copper mines,
Nifty and Mt. Gordon, in 2003. The Birla Nifty copper mine consists of an
underground mine, heap leach pads and a solvent extraction and
electrowinning (SXEW) processing plant, which produces copper cathode.
The Mt. Gordon copper operation consists of an underground mine and a
copper concentrate plant. Until recently, the operation produced copper
cathode through the ferric leach process.
In 2004, a copper concentrator was
commissioned to provide concentrate for use at Hindalco's operations in
Dahej. During FY2009, Mt. Gordon produced 17,815 tonnes of copper in
concentrate. Both Nifty and Mt. Gordon have a long-term life of mine off-
take agreement with Hindalco for supply of copper concentrate to the
copper smelter at Dahej.
Cornerstones of growth
Our well-crafted growth and integration hinges on the
three cornerstones of cost competitiveness, quality and global reach. We
are also committed to the triple bottom line accountability of economic,
environment and social factors. Care for the community around our
operating units is best exemplified by our deep-rooted social commitment.


Production profile
The aluminium production process can be
categorized into upstream and downstream activities. The
upstream process involves mining and refining of Bauxite to
Alumina, while the downstream process involves smelting, casting
and fabrication.
HINDALCO is amongst the best plants in producing
the world class Aluminium at the lowest cost in India.
The production of Aluminium is done in different
stages.Normally the stage consists of conversion of bauxite to
alumina. Then alumina is converted into aluminium. The refineries
at Hindalco are well established and cost worthly.They are very
efficient and wastage is very low.
Hindalco refines bauxites primarily obtained from
capative mines, to extract alumina,which is smelted into alumina
ingots and are called billets.Hindalco smelts its entire production
of alumina into aluminium and does not engage in alumina trade.

Production of Aluminium can be categorized into
two stages:-
# From Bauxite to Alumina

# From Alumina to Aluminium


Fully integrated operations - Renukoot

Indal synergies provide additional strength and operational
flexibility.


Hindalco alumina refinery process

Al2O3 (Alumina) to Reduction Plant


Reduction plant – process flow chart


Integrated Operations of Hindalco at Renukoot

Bauxite Mines

Co-Generation Alumina refinery caustic soda

from joint ventrue

Renusagar Aluminium smelter Aluminium Fluoride

(power plant) from j.v.

Semi fabrication plant

Redrow Rod Mills Rolling Mills Extrusion presses

Foils At. Wheel Plant


Production Capacities

Division Capacity Location
Alumina 1,160,000tpa 700,000tpa(Renukoot)
chemicals
110,000 tpa (Muri)
350,000tpa(Belgaum)
Primary 445,000tpa 345,000tpa(Renukoot)
aluminium
2,000 tpa (Belgaum)
100,000tpa(Alupuram)
14,000tpa(Taloja)
Extrusions 42,000tpa 30,000tpa(Renukoot)
12,000tpa(Alupuram)
Rolled products 200,000tpa 80,000tpa(Renukoot)
45,000tpa(Belur)
45,000tpa (Taloja)
30,000tpa(Mouda)
Wire Rods 64,000tpa 40,000tpa(Renukoot)
10,000tpa(Alupuram)
14,400tpa(Mouda)
Aluminium foil 11,000tpa 5,000tpa(silvassa)
6,000tpa(kalwa)
Aluminium 300,000pcs Silvassa
wheels
Power 1087.2mw 741.7mw(Renusagar)
78mw( Renukoot)
267.5mw(Hirakud)
Copper 500,000tpa Dahej
cathodes


Vision mission and value

“My objective has been to build a meritocracy…
An organization is about people who make it
And it would continue to be my focus”

Kumar Mangalam Birla

Vision

To be a premium metals major, global in size and reach, excelling in everything we
do, and creating value for its stakeholders.

Mission
To relentlessly pursue the creation of superior shareholder value, by exceeding
customer expectation profitably, unleashing employee potential, while being a
responsible corporate citizen, adhering to our values.

Values
Integrity: Honesty in every action. Path to excellence

Commitment: On the foundation of integrity, doing whatever it takes to deliver,
as promised.

Passion: Missionary zeal arising out of an emotional engagement with work.

Seamlessness: Thinking and working together across functional silos, hierarchy
levels, businesses and geographies.

Speed: Responding to stakeholders with a sense of urgency.


Hindalco Today

Aluminium has turned out to be the wonder
metal of the industrialized world. No other single metal can do so
many jobs, so well and so economically. Aluminium‘s growth rate
is the highest amongst the major basic metals today. Hindalco
ranks is the largest Aluminium producer in India, whose more
than 58% sale is in value added product and has more then 40%
in total market share. The company‘s fully integrated aluminium
operations consists of the mining of Bauxite, conversion of
Bauxite, into alumina, production of primary aluminium from
alumina by electrolysis and production of properzi redraw rods,
rolled products, extrusions and value added products like foil and
wheels at silvassa.
Hindalco‘s integrated operation and
operational efficiency have enabled the company to be one of the
world‘s lowest cost producers of aluminium. The company‘s cost
efficiency has helped it to record an outstanding performance in
the face of adverse market conditions. Hindalco also owns a large
captive thermal power plant at Renusagar that meets the power
requirement of the company very effectively. Hindalco currently
has aluminium capacity of 3,45,000 MTPA.
Ever last, a hindalco brand for aluminium-
roofing sheets, offers ideal and economical solutions for all
roofing and cladding needs. Hindalco also offers colors-coated
and tiled roofing profiles.


Business Performance Review

The company has recorded its best ever performance during the
fiscal 2008-2009.

Aluminium Copper Total
Rs.Mn Rs.Mn Rs.Mn

Net sales and 7,600.54 10,619.11 18219.65
operating

EBIT 1530.35 627.41 2157.76

Capital 22728 10765 33493
employed

ROCE(%) 9.04%

Aluminium business
The aluminium business demonstrated a stellar performance with
# Highest ever alumina and primary aluminium production with
over 100%capacity utilization at all operating units.
# Highest ever turnover and business profit.
# Highest ever EBIT margins at 50%.


Financial Review and Analysis
Highlights (in Rs. Millions)

Particulars FY 2008 FY 2009
Net sales and operating revenues 192010 182200
Total expenditure 157999 158140
Operating profit 34011 30366
Other income 4929 6369
Interest 2806 3371
Depreciation 5878 6454
Profit before tax 30256 26903
Extraordinary items --- ----
Provision for current tax 6063 4781
Provision for deferred tax 876 1214
Provision for fringe benefits tax 114 113

Profit after tax 28609 22303
Operating margins 17.06% 16.66%

Net Sales and Operating Revenues
Net sales and operating revenues for the year 2008-09
in increased by5% YOY on the back of higher aluminium volume, increased
VAP tonnage and buoyant prices for both the metals. A large increase in
net sales and operating revenues was though negated by a sharp decline
in US doller.


Conslidated revenues jumped from Rs.19316 cores to Rs.60013cores, an
increase of 211%.This includes NOVELIS‘ sale for the 10.5 months from
16th May, 07 to 31st March.FY09 will see incorporation of full-year NOVELIS
results.

Other income
Other income at Rs 4929 million was higher by 33.2% over the
last year largely due to higher pre-tax treasury yield and higher average
treasury.

Interest
The company‘s working capital requirement increased
significantly on account of. Higher copper prices driven by higher LME.
Rising interest rates resulted in higher average cost of borrowing which
rose from 7.24% last year to 7.51% this year.

Depreciation
Depreciation charges were at Rs. 5878 in FY09 against Rs
6380 millions in FY08.

Taxes
Effective tax rate went up to 26.8% to 23%on account of
increase in pre-tax profit by 66% over last year and also proportion of
income exempt from tax was lower in current year.

Profit
Net profit increased 12% to Rs 28609 million on account of
tax adjustment for earlier year. Cash profit increased from Rs 32,024
million to Rs 34,487 million.


Cash flow analysis
(In Rs.million)
Particulars FY 2008 FY2009 %
Source of cash
Cash from operating 2140 3171 23%
Non-Operating Income 619 691 5%
Net debt Inflows 964
Equity Raised 2424 4426 32%
Other treasury 5507 40%
investment(net)
Total 6147 13795 100%
Application of cash
Net capital Expenditure 888 967 7%
Investment in subsidiaries 2970 11004 84%
Other treasury 2124 193 2%
investment(net) 668 669 5%
Interest and finance charges --- 266 2%
Dividend payout
Total 6650 13099 100%
Increase/(decrease)in cash (503) 696
and cash Equivalents.

Source of cash
Cash from operations
Lower realizations for aluminium and lower TcRc
in copper impacted margins, however cash profit was higher by
8%. This coupled with higher working capital resulted in lower
cash flow from operation compared to last year.


Non-operating income
Cash from non-operating income increased to
Rs.691crores as compared to Rs 620crores a year earlier. The
increase is on account of higher dividend income and income
earned on utilized lone funds which got capitalized.

Equity
Your company raised Rs4426crores(net of
issue expenses) from rights issue for take-out of the bridge loan
taken for Novelis acquisition.

Other treasury investment(net)
Treasury investment were liquidated for take-out
of the bridge loan take for Noveils acquisition.

Application of cash
Capital expenditure
The company spent Rs.967crores on various
expansion and efficiency improvement projects. Going
forwards,this amount is slated to rise considerably as per planned
investment are made in planned drownfield and greenfield
projects.


Investment in subsidiaries
Aggregate invesments, including loans and
advances to subsidiaries, amounted to Rs11,004crores.your
company infused Rs.10400.37crores into AV mineral(netherlands)
BV a SPV created for acquisition of Noveils Inc. and this amount
was used by AV Minerals(Netherlands) BV for takeout of the
bridge loan taken for Noveils acquisition and servicing of debts on
its balance sheet. Investment (Including loans and advances) in
utkal alumina rose by rs.317crores.

Interest
Interest and finance charges paid for the year was
almost same as in last year.interest charged to profit and loss
account is only Rs.337crorenet of interest capitalized.

Dividend
Dividend paid including tax on dividend is
Rs266crores.
We have put in place a permanent capital structure to
support our strategic business plan. We successfully took out the
bridge of us$3.03billion in November 2008 admist hostile and
turbulent marco economic envirnoment. We managed to preserve
our balance sheet strength to grow by reducing our leverage
while doing so.


RISK MANAGEMENT
The company‘s management is
commited to furher strengthen its risk management capability in
order to project and enhance shareholder value. To that end, your
company has already undertaken an extensive risk management
effort that includes building a profile of the key risks to your
company.
This effort accomplishes the following goals:

# Responds to the board and executive management‘s need
for enhanced risk information and improved governance

# Provides the ability, manage and monitor the increasingly
complex risk in the business:

# Provides the explicit, comprehensives process to satisfy
the regulators, and stakeholders, that significant risk are being
effectively managed.
This framework will continue to evolve
and mature as risk management is implemented and experience
is gained. It will be reviewed and modified on a regular basis to
ensure its ongoing relevance and viability.
The company is in commodity business
and therefore its revenues and consequently the profitability are
exposed to volatility and cyclicality of commodity prices.
Moreover, its revenues are directly and indirectly linked with


Exchange rate of US-$/Indian-Rupee.The company also assumes
interest rate risk in course of its business.
Commodity price risk management
The company gets reference from quotations
of London Metals Exchange [LME] for its prices in domestic and
internationals markets. Consequently, the changes in the prices of
aluminium, copper,goldand silver significantly impact the
revenues of the company. In accordance with its management
policy,company endeavuors to reduce to commodity price risk
movements by entering into hedging contracts. The principal
objectives of the activity are to reduce volatility of furture cash
flows and to increase to visibility of furture revenues.
Foreign exchange risk
The company is exposed to foreign
exchange risk due to imports of raw materials, capital goods and
exports of finished goods. However, since company‘s revenues
[both exports and domestic]are linked with US-$/Indian- Rupee
exhange rate,any volatility in the exchange rate may significantly
impact the company‘s profitability.
In order to hedge the risk, the company
uses various tools such as foreign currency borrowings, currency
forward and option contracts in accordance with its foreign
exchange risk management policy.

Interest rate risk
The company borrows money from the
market to fund its working capital and expansion plans. These


borrowings are exposed to interest rate risk. While most of the
long-term borrowings are at fixed rate, the short-term borrowings
are exposed to interest rate Changes every time new loans are
drawn. The company uses a combination of interest rate and
cross currency swaps to manage the interest rate risk from time to
time.
Internal control system
Strong internal controls and an MIS
system define roles and reponsibilties of people across various
levles of the organization,enabling checks and controls and tight
monitoring on a continuous basis. All management decisions are
supported by well-defined and integrated MIS reports.
The management and the auditors,
internal and statutory, have detailed discussions from time to time
to identify key focus areas and to help the auditors prepare an
effective audit plan.

Conclusion of company
The company has recorded a strong performance despite the
challenging conditions in copper business posed by the falling
tariffs as well as production related issues. The success of its cost
optimization initiatives at its power plant in hirakud as well as
higher operating margins that the company has achieved.
The company has also made good progress on the
strategic growth projects that will propel it into the league of global
majors. Efforts towards obtaining relevant approvals for the
expansions are moving at a fast pace.


There have been significant developments during
the year towards meeting the funding objectives of the same. The
strong balance sheet, prudent financial practices as well as
expectations of improved operations give the confidence that your
company will be able to economically finance its growth plans. On
the whole the companyis poised to deliver superior value to its
stakeholders on a continuing basis.
OBJECTIVE
This above report outlines the detailed
guidelines,process flows and work steps related to the capital
expenditure investment analysis process at HINDALCO
INDUSTRIES LIMITED.


Introduction
To
Project

Capital Budgeting Tools and Analysis of Capital
Expenditures in Hindalco Industries Limited.

Introduction


Capital budgeting is a
financial procedure to ensure that capital
is allocated to value adding
opportunities. A capital
budgeting/investment proposal should be
accepted/rejected depending on whether
it generates, over the life of investment,
returns more than its cost of capital.

The
investment decisions of a firm are
generally known as the capital budgeting,
or capital expenditure decisions. A capital
budgeting decision may be defined as the
firm’s decision to invest its current funds
most efficently in the long-term assets in
anticipation of an expected flow of
benefits over a series of years. The long-
term assets are those that affect the
firm’s operations beyond the one-year
period. The firm’s investment decisions
would generally include expansion,
acquisition,modernisation and
replacement of the long-term assets.


Sale of a division or business(divestment)
is also as an investment decision.

Capital
budgeting is the process of evaluating
and selecting long-term investments that
are consistent

with the goal of shareholders (owner)
wealth maximization.
Capital Expenditure is an outlay of funds
that is expected to produce benefits over
a period of time exceeding one year.

Features of investment decisions:
# The exchange of current funds for
future benefits.

# The funds are invested in long-
term assets.

# The future benefits will occur to
the firmover a series of years.
The key requirement for capital project evaluation are
Access to the company’s requriment
financial return.

# Knowledge of the company’s
requirement financial return.


# Realistic evaluation of the prospective
cash flow and profit impacts of profits.

# Analysis of the costs and benefits of
project with attention to the timing of
their occurrence.

# Evaluation by senior management of the
strategic of large projects.

# A well- defined approval process.
# Consistency with strategic planning
and budgeting.

# A review procedure.
Investment decisions equire special attention because of the following reasons:
Growth: The effects of investment decisions
extend into the future and have to be
endured for a longer period than the
consequences of the current operating
expenditure. A firm’s decision to invest in
long-term assets has a decisive influence
on the rate and direction of its growth.

Risk: A long-term commitment of funds may
also change the risk complexity of the
firm. If the adoption of an investment


increases average gain but causes
frequent fluctuation in its earnings, the
firm will become more risky. Thus ,
investment decisions shape the basis
character of a firm.

Funding: Investment decisions generally
involve large amount of funds,which make
it imperative for the firm to plan its
investment programmes very carefully and
make an advance arrangement for
procuring finances internally or
externally.

Irreversibility: Most investment decisions are
irreversible.it is difficult to find a market
for such capital items once they have been
acquired. The firm will incur heavy losses
if such assets are scrapped.

Complexity: Investment decisions are among the
firm’s most difficult decisions. They are an
assessment of future events, which are

difficult to predict. It is really a complex
problem to correctly estimate the future
cas flows of an investment. Economic,
political,


social, and technological forces cause
the uncertainly in cashflow estimation.

Types of investment decisions
# Expansion of existing business

# Expansion of new business

# Replacement and Modernization

Objectives of the project
The objectives of capital budgeting are as
follows:

# Determines the economic viability of
new investment opportunities to ensure
effective allocation of scarce financial
resources.

# Ensure consistency between
procedures for evaluating performance
and methods of analyzing projects.

# Strengthen accountability for the
performance of new investments

# Provide the basis for future plans.


Type of the project
The project is descriptive and analytical in
nature

Sampling Plan:
There has been no sampling plan as such
as the study involves understanding the
various process and analyzing them. The
study involves the detailed analysis of
secondary data collected from various
sources and therefore no sample size
and plan has been considered.

Data source:
Data has been collected from both
primary and secondary source.
Primary source:
Information gathered by interview and
discussing with the employees of finance
department and my project guide,
Secondary source:
Annual reports of past three years.


Manuals of finance department

Internal circulation booklets

Internet sites like www.google.com.,
www.solidconey or @indiatimes.com

Data has been collected through
literature survey includes the collection
of data from various sources like
handbooks. Studymaterials etc.
Scope of study:
The study has been conduted from
information over a period of 3 years from
financial year2006/2007 to 2008/2009.
Period of study:
Period of study duing 25th may to 4th
August2010.
Assumptions:
Year is taken of 360 days.

All purchases have been taken as credit
purchases and all sales have been taken
as credit sales.


In the absence of relevant data the data
from internet site is taken as the relevant
information.

Methods of quantative analysis:
Calculation of capital decision

Calcaulation of weighted average Cost
of capital

Determining the debt –equity mix of the
firm

Use of graphical presentations of
financial

Analysis:
For the comparative analysis data were
used along with charts and necessary
diagram. Other than this different models
are used to access the true financial
position of the firm. The current year i.e
2010 has not been taken into calaculation
because, at that time of preparation of
this report annual closing accounting of
the company was going on.
Interpretation and recommendation:


After completion of the entrie analysis,
interpretation and recommendation were
made on the basis of figures and
diagrams. Statistical tools like tables,
charts ,graphs used for representation
of data.

Capital budgeting procedures


capital budgeting procedures are aimed at assessing an
investment‘s ability to create for shareholders. Assessing an
investment typically involves:
A) estimating financial metiers that allow an insight into the
expected value creation by an investment.
B) Performing risk analysis to evaluate distribution of potential
value that a project/ investment can create/ destroy.
The capital expending required medical dispensary, fire fighting
equipment etc. the various stages involved in the capital
budgeting process can be outline as follows:-
1 identification of investment proposals
2 preliminary screening
3 evaluation
4 establishing priorities
5 final approval
6 implementation
7 review

1- Identification of investment proposals:- some
investment projects are mandatory in mature whereas other are


replacement decisions. In such, the identification is not difficult because
the investment has to be made out of compulsion. If the law requires an
effluent treatment plant to be installed, there is no away out but to install
it, similarly, if a machine has been worm out or become obsolete, it has to
be replaced but investment decisions like R&D, expansion and
diversification involve discretion and hence the need to identify profitable
and strategically coherent investment project that get well with the exciting
risk profile of the firm. In such cases the management has to keep a vigil
on the development- taking palce in the market and keep scouting for
idea.

2- Preliminary screening once the investment proposals have
been identified, the next step is a preliminary screeing. This is important
because it is quite possible that some project may appear to be very
attractive but still may not be desirable because of so many reasons like
their integration with the firm‘s existing portfolio of projects may be
diffcult. At the same time if a less risky but profitable project were
rejected, it would mean loss of any opportunity. So very care has to be
exercised before accepting or rejecting a project preliminary screening
helps assess the technical feasibility of the project, availability of resources
and judge the adequacy of expected returns to compensate for the risk
involved.

3- Evaluation all the proposals, which pass through the preliminary
screening process, are then analyzed in more detail. A detailed market
analysis, technical analysis, technical analysis and financial analysisis then
undertaken to judge the profitability of the project. Projects are classified
according to their nature. For example expansion projects, diversification
projects etc.and ranked within each classification in terms of profitaility
risk and degree of urgency. There are many methods, which may be used


for financial analysis such as payback period, rate of return method, net
present value method etc.

4- Establishing priorities once the project has been selected, the
next step would be prioritizing these projects. This is requried because it
may not be possible for the firm to invest immediately in all acceptable
proposals and to establish priorities on the basis of urgency and expected
returns.

5- Final approval proposals finally recommended by the
committee are sent to the top management along with a detailed report,
both of capital expenditures and of sources of capital for final approval.
The top management then calls a meeting where these proposals are
examined and the financial manager is asked to present several alternative
capital expenditure budgets for the recommended proposals. The top
management then finally selects some of the important proposals. Once
capital expenditure proposals have been finally selected, funds are
allocated to them. Projects are then sent to committee for incorporating
them in the capital budget.

6- Implementation once a capital expenditure budget has been
prepared and a proposal has been included in the budget, the next step is
to requisite the authority to go ahead with the projet. Before such
authorization, the capital expenditure committee may like to review the
profitability of the project in the changed circumstances. If it is satisfied, it
gives a green signal and work on the project can be stated without any
delay. Network techniques such as PERT and CPM can also be appiled
to monitor the implementation of the projects.


7- Review last but not the least is the review of the projects, after it has
been fully implemented. The objective of this review is to evaluate the
performance of the project. The evaluation involve comparsion of actual
expenditure an project with the budgted ones, and the comparsion of the
actual return from the investment with the anticipated return the
unfavorable variance, if any should be looked into and the process of the
same be identify so that corrective may be taken in future.
Financial evaluation criteria
the NPV of free cash flows/ PV of EVAs criterion is the undelying
principle to determine project/ business viability. However one should
look at other parameters for getting better understanding on risks and
rewards associated with an investment. There are a number of financial
measures that are frequently used to assess the viability of an investment,
e.g. IRR, payback, profitability index etc. these measures cannot be used
in isolation and should be used along with other measures.for
example,the NPV of a project, derived through the discounted cash flow
method, will tell you whether the project creates value or not, but will not
indicate whether there are many years of negative value-creation followed
by a few year of large, positive value creation, which go to make up this
NPV.
NPV and NPV distribution of project in relation to alternatives
The net present value of a project is theover arching criteria for
evaluating an investment. NPV of a project is estimated as the present
value of all future cash flows minus the initial inestment requried.this
therefore measures the value creation by a project. The evaluation of a
project should include a comparison of NPV of the project and the


project and that of its alternatives. The alternative with highest NPV
should be accepted. Even when the expected outcome of a project has a
negative NPV, the project might not be abandoned where there are
overriding circumstances. While the NPV of a paricular project may be
negative NPV because of overriding circumstances.
NPV of a project is measured as( for a 4 years forecast period)

NPV = CFo + CF1 + CF2 + CF3 + CF4 + TV - initial

(1+C)0 (1+C)1 (1+C)2 (1+C)3 (1+C)4 (1+C)4 investment

NPV = EVAo + EVA1 + EVA2 + EVA3 + EVA4 + TV

(1+C)0 (1+C)1 (1+C)2 (1+C)3 (1+C)4 (1+C)4

Where,
CF and EVA represent the free cash flow and EVA from the project in a
given year;
‗C‘ represents the cost of capital for the project which will not be less than
the business WACC, adjusted for additional risks attached with the
project depending upon the product profile, technology, financing mix,
location of investment etc. and TV represent the value of cash flows from
a project accruing after the forecast period(in this case 4 years) at the end
of years 4.


For larger and riskier projects both the NPV and the probability
distribution of the NPV should be compared with its alternatives, in terms
of
1- The expected values, and
2- The probability of positive NPV

Internal Rate of Return (IRR)
IRR measures the return offered by a project on an average
over the life of the investment. IRR is therefore also that discount rate for
which the NPV of the project is ZERO. IRR therefore can be measure
using the above NPV equation by finding that value of ‗c‘ for which NPV
equals ZERO.
All projects for which IRR> cost of capital create value for
the shareholders and those with IRR<cost of capital, destroy value. IRR is
a measure of average return from the project and not that of total value.
Due to this reason it can somethimes give conflicting signals from NPV
when comparing alternatives.

EVA and FCF profile
EVA and free cash flow profiles for a project show the pattern of wealth
creation from a project. A comparison of two profiles can often yield
useful insights into source of value creation and project risk. Cash flow
analysis is also useful in financial planning.


Eva vs FCF profiles can yield insights into a project‘s risk
NPV(FCF)=50m
PV(EVA)=50m

400
300
200
100
0
-100
-200
-300
-400
1999 2003 2007 2011 2015 2019 2023

PV of FCF(for each period), PV of EVA based on cash taxes(for each yr.)

Payback period
The Payback period simply indicates by what time the cumulative cash
inflows equal the cumulative cash outflows.


This measure has two key failigs
First, it does not account for the time value of money. In other words, it
treats a rupee in the first year as equivalent to a rupee in the third year(or
any other year.)
Second, it does not consideration the profile of cash flows beyond the
payback period. It is possible that a project which breaks even quicker
yields very little cash subsequently. A competing project may have a
longer payback period but may provide high cash flows subsequently.
Years to discounted cash flow and EVA breakeven
The discounted payback is a refined version of the payback period. It
indicates by what time the cumulative discounted cash inflows equal the
cumulative cash outflowsThe cumulative discounted cashflow breakeven
point represents the years it takes for the initial investment to be
recovered. At the cashflow breakeven point, the business would need to
be sold at a value above zero to recover initial investment. This tackles the
first deficiency of payback period measure, discussed above, but is still
prone to the second problem.
The cumulative discounted EVA breakeven point represents the years it
takes before value starts getting created. This is the period after which the
cumulative discounted EVAs from the project become positive. At the
EVA breakeven point, the business would need to be sold above book
value of capital to recover initial investment.
The two profiles and breakeven point may be dissimilar. In general a
shorter breakeven on cashflow and EVA is preferable, overall NPV being
the same.

Profitability index or NPV per rupee of capital


Profitability index is measured as
NPV of the project divided by the total amount of initial investment. This
therefore measures the value created by the project for every rupee
invested. This measure is useful for ranking projects for investments when
there is a limited amount of money available to be invested. Ranking
projecs based on profitability index(PI) and investing money only in
projects with highest Pis, will result in maximum NPV on the limited
funds available.

Percentage of value in terminus
The percentage of total NPV residing in
terminal value should be used to assess the proportion of value derived
from the ‗nearer‘ explicit forecast period. This is calculated as the ratio of
discounted terimal value to total NPV.

Other measures
The following measures should also be calculated for a project/
investment and included in the capital budgeting proposal
Return on capital from the project in the initial few years. This is
measured by the impact of earnings from project divided by total amount
of capital invested.

Return on assets from the project in the initial few years. This is measured
as PAT impact from project divided by total assets.

The capital budgeting framework


The investment analysis framework. The framework shows various steps
that are required for estimating the financial metrics and generating
outputs that are required for assessing the value creation potential of
a.project and therefore from the basis for accepting/ rejecting capital
proposals Each of these steps is detailed in subsequent chapters, which
cover the principles and methodlogies to be appiled for each of the
analysis.

Identification forecasting cost of capital terminal
Of alternative cashflows determination value computation

NPV risk and capital request
Computation sensitivity analysis proposal preparation

The capital budgeting process


Step:1
Identify alternatives:
it is important to properly all available alternative when evaluating a
project proposal. The correct decision criteria for evaluation of
investment is to adopt the alternative that gives the highest NPV and not
just any project with a positive NPV among all mutually exclusive
alternatives. In case where an action has to be taken and all available
options yield negative NPV, then the option that gives the least negatives
NPV should be adopted.
Guidelines for identification of alternatives
A company typically faces multiple alternatives for any investment analysis
decision. At a broad level, a company has the option of investment in
varied business and this choice should be based on strategic
considerations.At a minimum, the NPV of the project should be
compared with the NPV of the ―no go‖ alternative. Various alternatives
tothe project can be seen as opportunities foregone in accepting one
course of action


Figures:
Identification of alternative

Undertake new project Status quo

Outsource Invest in Facilities

Buy Convert type technology/ location size
Of Investment processes


Acquire
Greenfield project
Brownfield project

Guidelines for evaluating alternatives:
Use one of the two approaches-incremental and holistic approachAny
alternative should be evaluted based on their incremental impact on the
cash flows of the firm. There are two broad approaches that can be used
when identifying the incremental value impact of a project/investment on
the value of a business/ company. The choice of approach depends on
the ease with which one can eastimate the value impact on the business/
company. The following table describes situations under which either of
the two approaches may be more useful.Incremental and holistic
approach

Basis of Analysis Rationable Examples of Decision criteria
projects

Incremental 1- It is easy to Setting up a NPV of project
identify revenues greenfield plant cash flows
and costs of the
project
2- Project does
not have
company wide


implications
Holistic/company Project could Acquisition of a Compare NPV
level affect other competing brand with and without
revenues and the project
expenses at the
company level

It is better to conduct an incremental analysis except when the project will
have company wide implications. In order to evaluate an investment
decision basis, a base case must be clearly eastablished.

Step :2
Forecast cashflows for alternatives under consideration
To forecast cash flows first forecast all the drivers of cashflows
that will be impacted if the project is accepted. It is recmmended that
appropriate drivers for each parameterforecast be chosen based on
industry dynamics and project strategy. Where necessary prepare and
forecast an intergrated income statement for the analysis. These drivers
will from the basis for projecting the individual line items in the
statements and will also enable benchmarking and refinement of
assumptions.
Forecast both revenues and costs in nominal terms explicitly stating
inflation assumption for finished goods and various raw material item.
This is useful as finished goods and raw material ites can have different
inflation rates. We will be using nominal WACC for discounting cash
flows.
These inflation rates may be best observed from historical trends and
derived from expected demand- supply dynamics specific to the industry


When either the costs or revenues are incurred/ received in a currency
different from domestic currency, use forward exchange rates for
converting projected costs/revenues in foreign currency into
base/domestic currency. Forward exchange rates can be obtained:
Wherever possible and for the maximum duration available, prevailing
forward exchange rates should be used in translating foreign currency cash
flows to local currency.
When evaluating investment in other countries :base currency used for
projecting cash flows should be consistent with the cost of capital estimate.
All revenue, cost and capital items should be forecasted in the currency in
which these are receivedor incurred and converted into base currency
before esimating project cashflow/EVAs.

When forecasting cash flows for investment in a cyclical business:
The forecast can model the cyclicality into the foreasts as a base case
scenario and making sure that the forecast period covers one full cycle.
Given that cycle cannot be predicated with accurancy and both the
duration of the cycle and the base trend line may change over time,
forecast should use probabilistic scenarios for determining NPV as
discussed in section on risk analysis.


Step:3

Cost of capital
Determination of cost of capital hindalco

The term cost of capital is refferred to the
discount rate that is used in determining the present value of the
estimated furture cash proceeds. The cost of capital is used as
the discount rate to claculate the NPV. It is the minimum rate of
retrun that a firm must earn on its investment for the market value
of the firm remain unchanged.
The cost of capitalof the firm is the
composition of several factors, which means that has its own cost
firstly we calcaulate the specific cost of various components and
then and then we combine them to reach to the overall cost of
capital of the firm, which is referred as weighted average cost of
capital of the firm.

Cost of Debentures:
Cost of debt is the after tax cost of long
terms fund through borrowings. The funds raised though debts is
in the form of loans and debentures. Hindalco has both short-term
and long-term. It also has current liabilities such has creditors.


a. 6.39% Non convertible Debentures of rupees 1 crore each=
100 crore shares.
Tax rate= 22.3%

IP= Interest payable
T=Tax rate
NP= Net Proceeds

IP=10000000 x 6.39/100=639000
639000(1-0.223)/1000000x100
=639000(.0777)/ 10000000 x100
=496503/10000000 x100
=0.0496503 x100
=4.96503%

b. 6.50% NON convertible Debentrues of rupees 0.1 crore each=
250 crore shares.
Tax Rate= 22.3%


IP= Interest payable
T=Tax rate
NP= Net Proceeds
IP=10000000 x 6.50/100=65000
[65000(1-0.223)/10000000] x 100
=65000(0.777)10000000 x 100
=50505 /10000000 x 100
= 5.0505%

c. Loans and Borrowings
Total loan taken by firm= 8324.29crore
Total Interest = 669.65crore

= [669.95(1-0.223)/8324.29] x 100
= [669.95(0.777)/8324.29] x 100
= 6.2534%
d. Government of India Bonds


Total GOI bonds= 2039crore
Cost of Bonds= 8%

Weighted Average cost of capital of Debt

In Crores
Particulars Total amt. propotion Cost Weighted
cost
100 0.092 4.97% 0.45724
Debentures(a)
250 0.0233 5.05% 0.118
Debentures(b)
8324.29 0.777 6.25% 4.856
Loans
2039 0.1903 8% 1.5224
GOI Bonds
10713.29 100 6.954%
Total
So, the total weighted average cost of DEBT=6.954%

COST OF PREFERRENCE SHARES
The cost of preference capital is the annual preference share
dividend divided by the net proceeds from the sale of preference
shares. Or we can say that it is the dividend expected by the
preference shareholders. Unlike interest payment on debt,
dividend payable to preference share is not tax deductible.


Number of shares=2032734shares @2Rs.
Interest Rate= 6%
Dividend on preference share= 0.02crore

Dividend tax on preference shares=0.01crore

PD= Payable Dividend
NP=net proceeds
t=dividend tax
Kp= cost of preference share
PD= 2032734 X 6/100
=0.02crore
Dividend on one share= 2 X 6/100
=0.12Rs/share
NP/Share= 2 Rs
Dividend Tax= 50%
Kp=
[0.12(1+0.50)/2]X 100
=0.18/2 X100


=.09 X100
= 9%

Cost of equity shares
It is the rate at which discount the expected dividends of the firm
to determine its share value. When equity shareholders invest
their funds they also expect returns in the form of dividends. The
market value of the shares is the function of the return that the
shareholders may be expected and get. If the company does not
meet the requirement of the shareholders and pay dividends, it
will adversely affect the market value of the shares of the
company.
Cost of equity shares of firm

Year Earning per
share

1998-1999 7.16
1999-2000 7.74
2000-2001 8.57
2001-2002 8.67
2002-2003 5.92
2003-2004 8.53
2004-2005 5.92
2005-2006 8.67
2006-2007 8.57
2007-2008 7.74
2008-2009 7.16


Dividend growth model
According to this approach the cost of equity capital is calculated
on the basis of the required rate of return in terms of future
dividends to be paid on shares.
The formula for calculating it, is as follows:
Estimation of growth rate
There exist different methods for the estimation of growth rate of
the firm
Internal growth
This approach may be used when the firm has the stable dividend
policy. Hindalco‘s payout ratio has fluctuated over the year. But if
we see the past 10 years record of the firm we can say that
generally company distribute upto 20% of the total profit not more
than that. And retained 80%of the total profit. In 2006 company
retained 85% of the total profit.
Growth may be calculated by calculating the product of retention
ratio and ROE
g=Retention ratio X ROE(year2009)
=0.88 X 0.094
=8.272%


Cost of equity taking into consideration internal growth rate as g
D1 =1.35
Po=55.75(As on 31st march)

Cost of equity = 1.35/55.75+8.272
=10.69%

Past average growth
In practice the growth may be based on past EPS rather than
DPS since companies do not change their DPS frequently with
changes in EPS. Thus DPS grows at a slower rate. The average
of EPS past growth rates may be used as a proxy for the future
growth. There are two alternatives available for calculating the
average.
The arithmetic average :- The arithmetic average EPS growth rate
for HINDALCO(1998-2009)
= (7.74-7.16)/7.16+(8.57-7.74)/7.74+(8.67-8.57)/8.57+(5.92-
8.67)/8.67+(8.53-5.92)/5.92+(13.48-8.53)/8.53+(16.79-
13.48)/13.48+(25.52-16.79)/16.79+(22.23-25.520/25.52+(14.82-
22.23)/22.23/10X100
= (0.81+0.1072+0.012-0.317+0.441+0.58+0.25+0.5199-0.13-
0.333)/10X100


= 1.211/10X100
= 12.11%
Cost of equity taking into consideration arithmetic average rate as
g (growth)
Cost of equity= 1.35/55.75+12.11
= 14.53%
The geometric average: - The geometric average will give a
compound average and is preferable when there is much
variability in EPS data. The geometric average EPS growth for the
past 10 years is a follows.
Formula (1+g)n=EPSn / EPSo
Where
n= Number of years
EPSn=EPS of current year
EPSo= EPS of base year
EPSn=14.82
EPSo= 7.74
n=10
1+g=10√14.82/7.74 X100
1+g=10√1.92
g=1.0674 – 1


g= .0674 x100
g= 6.74%

Cost of equity taking into consideration geometric rate as g
(growth)
Cost of equity = 1.35/ 55.75+6.75
= 9.16%
Estimate of growth rate and cost of equity according to that:

Method Growth rate Cost of equity

Internal growth 8.272% 10.69%

12.11% 14.53%
Arithmetic average
6.74% 9.16%
Geometric average

Growth rate and cost of equity of firm
For different growth rate HINDALCO‘s cost of equity is calculated.
It varies from 15% to 10% so on an average we take 12% as the
cost of equity of the firm.


Cost of retained earnings
The companies do not generally the entire profits earned by them
by way of dividends among their shareholders. They retain some
profits for the future expansion of the business. The amount
retained by the company, if it had been distributed among the
shareholders by way of dividends, would have given them some
earnings. The company has deprived the shareholders of these
earnings by retaining the part of profit with it. Thus the cost of
retained earnings is the earnings forgone by the shareholders.
Simply stated the opportunity cost of retained earnings may be
taken as the cost of retained earnings. It is equal to the income
that the shareholders can earn by placing these funds in
alternative investments.

Weighted average cost of capital of HINDALCO

PARTICULAR TOTAL PROPORTI COST WEIGHTED
S AMOUNT ON COST

Debt 10713.29 0.310814 6.954 2.1614%
%
Preference 0.41 0.000012 9% 0.000108%
Equity 170.027 0.0049 12% 0.0552%
Retained 235384.69 0.68424 12% 8.21088%
earnings
Total 34468.417 1.00 10.427588%


Interpretation
so, the weighted average cost of capital of the firm is 10.427588%
so, on the basis of this we can say that, if HINDALCO is
considering an investment project of average risk that has a same
capital budgeting as HINDALCO, then it can use 10.43% as
discount rate to compute the project‘s NPV.

Indifference point
The EBIT level at which the EPS is the same for two alternative
financial plans is referred to as point of indifference. Means the
level of EBIT beyond which the benefit of financial leverage begin
to operate with respect to earning per share. In operational terms
if the expected level is to exceed the indifference level of EBIT,
the use of fixed charge source of funds would be advantageous
from the point of view of EPS i.e. the financial leverage is
favorable and leads to increase in the EPS level of the
shareholders. If however the expected level of EBIT is less than
the indifference point, then firm must use equity share capital.
Formula:
(X-I)(1-t)-Dp(1+Dt)/N1=(X-I)(1-t)-Dp(1+Dt)/N2

Where,


X= Earning per share at indifference point
I= The amount of interest on debt
T= Tax rate
Dt= Tax on preference dividend
Dp= The amount of dividend on preference shares
N1= Number of equity shares outstanding (old+new)
N2=Number of equity shares outstanding (old)

Future investment decisions by HINDALCO
The expansion programme of hindalco
industries ltd, the flagship company of the Aditya Birla Group, is
on track, the company management said at a recent press
conference in mumbai. The aluminium major has set a total
capital expenditure programme of Rs 25000 crore till 2012, by
which time its aluminium production capacity would have surged
to 17 lakh tpa from around 5 lakh tpa now.
Hindalco had acquried canadian aluminium
product marker Novelis in 2007 for$ 5.9billion and has also
announced investment of $4 billion(Rs19800crore)over three
years to expand capacity of India. Novelis has reported a net loss
of $1.8 billion is the 3rd quarter ended 31 december 2008 on
largely to a goodwill loss of $1.5 billion, a fallout of the ongoing
global meltdown.


Now here as company had decided to
raise 25000 crore rupees from the market. They can raise this
money through any of the following options:
# Company can raise 25000crore from the market in the
from of equity share of Re 1 each.
# company can raise money through debentrues @6.50% of
Rs 1000000 each i.e. company is issuing 25000 debentures.
Now the present capital structure of the firms is:
Total equity share capital 170.027 crore.
Dividend on preference share = 0.02crore
Dividend tax on dividend of pereference share=50%
Total interest payment by the company to debt=669.65crore at
the tax rate of 22.3%
Now on the basis of this we can calculate the point of indifference
of the firm.
Total number of new+ old equity share=(170.027+25000)crore
=25170.027crore
Total interest on debt(old+new)= (669.65+1625)crore
=2294.65crore


Calculation:

PLAN 1
(X-669.65)(1-0.223)-0.02(1+.0.50)÷25170.027
PLAN 2
(X-2294.65)(1-0.223)-0.02(1+0.50) 170.027

= (X-669.65)(0.777)-0.03÷25170.027=(X-2294.65)(0.777)-
0.03÷170.027
= 0.777X- 52.31805-0.03÷25170.027=0.777x-1782.92-
0.03÷170.027
= 0.777X-520.35÷25170.027 =0.777X-1782.97-170.027
= 0.777X-520.35÷0.777X-1782.97=25170.027÷170.027
= 0.777X-520.35÷0.777X-1782.97=148.036
= 0.777X-520.35= 115.027X-0.777X
= 63423.20÷114.24=X
= 2305.88crore= X

Interpretation
Now here this shows that at 2305.88crore of EBIT there exist
indifference point. Mean at this point the EPS is same wether the
company uses equity a its uses just for raising funds from the
market. if firm is expecting EBIT more than the level of


indifference level them in such a case using plan 1 is more
benefical for the firm. Because the greater is the level of EBIT
than the indifference point the stronger is the cause of using
leverged financial plan to maximize the EPS of the firm.

Step:4
Risk analysis
Having estimated various metrics using the steps described in
pervious sections, we now need to perform risk analysis to
understand the potential upside/ downsides to value the potential
of a project from its base case. This section provides guidelines
for and illustrates the use of risk analysis methodologies in capital
budgeting decisions.
A project‘s systematic risk is already captured through the
discount rate. The unsystematic risk can be dealt with by
adjusting either the discount rate or the cash flow forecasts. It is
recommended that the latter approach be followed because
1-The correct factor which will adjust for the unsystematic risks in
the cost of capital is not easy to identify.
2-Having multiple discount rates within a company can be a
source of confusion to operating managers.
Risk analysis provides a means of estimating project value under
different sets of circumstances. it is way to evaluate uncertainty or


risk. The adjustments to the forecast take place primarily in the
NOPAT and capital projections and the terminal value
assumptions.
The following approaches need to be used when performing risk
analysis and generating risk analysis outputs to be included in the
capital proposal.
Approaches and applicability:
There are three approaches to risk analysis that can be applied
depending on the degree of risk and capital requirements of the
project
1-multifactor sensitivity analysis
2-scenario analysis
3-dynamic more carlo analysis

Applicability of risk analysis approaches

High Scenario Monte carlo
probability Analysis
Capital analysis
Expenditure
Multi-factor Scenario
probability
sensitivity
analysis
analysis
Low
Low Risk High


Sensitivity analysis

An alternative to point valuation is to develop a
range of possible outcomes. A simple sensitivity analysis may
involve looking at specific variables and determining their impact
on NPV, while keeping all other variables constant. This type of
analysis can be depicted by a tornado chart and can be used only
to highlight the major variables affecting a project‘s NPV but also
help determine which variables to focus on in conducting further
risk analysis.

1-in order to identify sensitive variables,it is the project team‘s
responsibility to identify theranges for each operating and capital
investment item.the ranges should be based on benchmarks
derived from project –specific technical estimates or ihistorical
data or industry wide/analyst eastimates if available or marco-
economic eastimates wherever possible
2-the impact on NPV of varying an individual variable over its
range is depicted through the tornado chart

3-sensitive variables are defined as the top 4 variables which
impact NPV the most.


Figure : Tornado chart showing the sensitivity to PV(EVA) of
specific project

%change in NPV from base case due to +/-%change in variables
-9% -6% -3% 0% 3% 6% 9%

% variation from base case
1-capex (-10%to 20%)
(asset replacement)
2-change in (1%to2%)
selling price
3-change in man- (3%to 0%)
power costs
4-change in raw material (10%to4%)
Price
5-terminal growth (-4%to4%)

Scenario analysis


Where required this improved method of dealing with uncertainty
should be used. The method involves forecasting alternatives
outcomes and the likehood of each outcome.
1-every outcome is constructed at the company level by choosing
a particular value for every variable such that the set of all values
taken together represents a real-would possibility. The values
chosen for each variable in an outcome should be consistent with
each other.
2-at the minimum 3 scenarios should be constructed- downside,
base and upside
3- the NPV is calculated for each outcome
4-the project team should assign probabilities for each outcome
such that they add to 1. These probabilities should be based on
judgment
5-the weighted average NPV of the various scenarios gives a
probabilistic estimate of the NPV
In addition to scenario analysis, decision tree analysis should be
used for project
1-involving significant uncertainities‘.
2-where the funding commitments can be spread out over a
period of time.

Decision tree analysis process:


Identify decision generate integrated layout strategic
Points Scenarios Implications

Capital rationing and planning
Capital rationing is required as the organizations have limited
resources. The rationing is therefore needed in such a manner
that the incremental NPV from chosen investments/projects is
maximum.
A limitation to ranking projects is that it must be done in a static
environment assuming all investment opportunities available for
evaluation at the same time- this is rarely realistic.

How to ration capital
To rank projects, use profitability index (PI) defined as NPV of
project/PV of capital invested during the life of the project.
Projects should be ranked overall to maximize the total NPV.


However, strategic reasons for implementing the project should
always be considered along with PI for final selection of the
projects.
If two alternatives/projects have the same PI, a comparison of
discounted cash flow profile or the IRR should be used as a
secondary evaluation measure.

The capital budgeting process at Aditya Birla
Group
There all investment proposals at Aditya birla Group business are
classified and also the level of analysis required for each of these
investments. The section also presents the standard outputs from
the capital budgeting analysis that should be included in a capex
proposal.


Executive summary
The major objective of the study is the
proper understanding of capital budgeting and financial position of
HINDALCO and to suggest measures to overcome the shortfalls if
any.
Among all the financial management
decisions one of the important decisions is capital budgeting
decision i.e. deciding about debt- equitymix and capital
techniques this project helps in analyzing the capital budgeting of
HINDALCO. Is the firm is trading on equity or not? What is the
relationship between application and source of cash and weighted
average cost of capital other than this the project also analysis the
long-term solvency and short-term solvency of the firm taking
global and India market situations in mind with use of ratio
analysis because to analysis the financial position of a firm one of
the method is ratio analysis which uses data from the balance
sheet and income statement to produce values that have been
easily interpreted financial meaning.
The firm results shows that the
performance of the firm is better in 2008 than in 2009, and the
major reason for this is economy down term during this financial
year other than this the aluminium market is also affected
severely due to sharp fall in the LME prices. But the performance
of the company and the EBIT level of the company the highest
relative to domestic and global peers. The company recorded
highest ever-primary aluminium production this year and become
the first indian company to produce more than 0.5mn tones in a
year.


In case of cost of capital of the firm
company the debt proportion in the company is low as compared
to shareholders fund and the maximum out came from reatined
earnings. The major competitors of Hindalco also have low on
loan & borrowing.Since aluninium seeks is highly valnerable to
fluctuations in LME. So this is the main reason due to which
companies in this sector avoid using more debt financing.
Company has also declared to raise 25000crore from market in
the form of equity shares. So, decision of the firm itself indicates
that company is now trying to increase there equity proportion
rather than using more of debt. Other than this in 2009 end
compaines 350 crores of debentures and going to redeemed.so
this leads to more increase in the proportion of equity in the total
financial position of the firm.
The future predictions of aluminium
industry are positive,as it indicates the increase in the demand
and consumption of aluminium at global level in other than this
there are various emerging sectors also likes automobiles
industry where the usage of aluinimum increase with very high
pace.
Hindalco provides better return to its
sharholders and are having more equity than debt. Therefore, the
company remains in the safety range and is maintaining the
balance.

findings


Unlicensed-capital budgeting

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