Under threat from the public-sector National Aluminium Co (Nalco), which is expanding capacities at a cost of around Rs 4,000 crore, Hindalco is counting on a "major" brownfield expansion at its integrated smelter site in Renukoot, Uttar Pradesh, to hold on to the numero uno slot.

Also on the cards, is participation in the bidding process for the strategic sale of Bharat Aluminium Co (Balco). If successful, the acquisition will add 100,000 tonnes of smelter, 200,000 tonnes of alumina capacity, and a chain downstream facilities to Hindalco's existing capacities.

"The political instability is causing a delay in the privatisation of Balco. When a proper mode for the strategic sale isdecided, we will give it a serious look," says Agarwala. He, however, declined to divulge details of the brownfield expansion plan, but said: "By no means will it be a minor expansion. It will be a big investment, though the size will be less than the proposed one at Orissa. There will be a significant addition to the existing capacities of the smelter, alumina refinery and that of rolled products."

Speaking to The Financial Express from Hindalco's corporate office in Renukoot, Agarwala said: "The feasibility study for the project is underway and will take another two months. Till then I would not like to put a figure to either the amount of investment that will be required or the configuration."

Hindalco last year became India's largest producer of aluminium by expanding smelter capacity to 242,000 tonnes, and also has an alumina capacity of 450,000 tonnes.

Nalco is the second-largest producer with a smelting capacity of 230,000 tonnes, which will increase to 345,000 tonnes following thecompletion of its ongoing brownfield expansion.

At Aditya Aluminium, Hindalco was looking at setting up a 250,000 tonnes per annum smelter and a one million tonne alumina refinery. Downstream capacities were not considered at the initial stage. Analysts say that since the minimum size of an efficient smelter module is around 100,000 tonnes, additions to alumina capacity by another 200,000 tonnes and captive power plants, could set the company back by at least Rs 3,500 crore.

Agarwala said: "It (shelving the Orissa project) is not the end of the world for Hindalco. Earlier it was considered prestigious to go ahead with large investments but now, the situation has changed significantly. Apart from other reasons, we have to take into account what sort of return a project can give us. "If one has to tap international markets for funds, like we would have done for the Aditya Aluminium project, we had to ensure that the project would have a return on equity (ROE) of at least 20 per cent. But given theconfiguration that we were considering, attaining an ROE of 20 per cent would have been very difficult. Hence, we decided to shelve the project for the time being and are considering several other options. The brownfield expansion at Renukoot is definitely one of them. We could also go for stand-alone refineries or even smelters, but it is too early."

INSIGHT
Higher returns expected

Hindalco's decision not to go ahead with the greenfield expansion at Orissa has been lauded by the stock markets. Since the company made an official announcement to the effect on June 30, the stock has appreciated by over 30 per cent. The chairman's historic statement that the company would prefer to return excess cash to shareholders rather than invest in projects that did not yield returns in excess of the cost of capital, appears to have gone well with the investors. As the resources required for a brownfield project are far lower compared to an identical greenfield capacity, a higher return on investmentcan be expected from brownfield expansions. Since the company has declared that it will not invest in projects that promise returns lower than 20 per cent, it is clear that the management expects to earn an ROI of over 20 per cent from this expansion.

Sarad Saraf