Favourable credit outlook for primary aluminium industry

THE CREDIT Rating Information Services of India (Crisil) in its February issue of Crisil Insight has stated that it has a favourable credit outlook for primary aluminium producers. In future, while the domestic industry's performance will continue to be guided by global factors, domestic players are expected to maintain their favourable credit risk profile in the medium term given their globally competitive cost structure, comfortable LME price expectations and anticipated demand growth in the domestic market.

In the medium term, domestic supply is expected to increase due to capacity expansions by the existing players. However, this surplus capacity is not likely to have any impact on the performance of the domestic players as they will be able to export the surplus production, given the cost competitiveness of the Indian industry. In addition, in line with the global industry, the domestic industry is in a consolidation phase, characterised by the takeover of Indian Aluminium Company (rated AAA/FAAA / P1 plus by Crisil) by Hindalco Industries (rated AAA/P1 plus by Crisil) and the recent disinvestment of 51 per cent stake in Bharat Aluminium Company (Balco) to Sterlite Industries (rated AA/P1 plus by Crisil) by the Government. This consolidation may lead to the emergence of one or two strong players and thereby reduce the competitive pressures and consequently the irrational price undercutting.

Crisil has rated four of the five primary aluminium producers namely Hindalco Industries (rated AAA/P1 plus), National Aluminium Company (rated AAA), Indian Aluminium Company (rated AAA/FAAA/P1 plus) and Madras Aluminium Company (rated P1 plus). These companies accounted for around 88 per cent of the total domestic sales of the industry during 1999-2000 and their outstanding ratings reflect their favourable business and financial risk profile. Over the past few years the rating agency has observed that the credit quality of these companies has remained favourable even during the toughest times for the industry when the LME prices have gone down to $1,200-1,300 a tonne levels or domestic demand had slowed down.

It has been observed that although the profitability of these players is a function of the fluctuations in LME prices, rupee- dollar exchange rates and prevalent import tariffs, the players have actually been able to maintain their operating margins in the range of 34 per cent to 41 per cent during the last five years. The margins of these players continued to remain high as the domestic prices are less volatile and have not moved down to the same extent as the declining LME prices primarily due to the protection provided by the depreciating rupee and the increasing import tariffs. Further, the aggregate gearing of the four Crisil rated players has also remained favourable in the range of around 0.24 to 0.28 times during the period indicating the inherent strengths of the domestic aluminium industry and its strong cash generating capabilities.

In the near to medium term future, the outlook on LME prices for aluminium is comfortable and prices are expected to hover around the $1,500-1,600 range. Any major upswings in the LME prices are not expected given the early signs of slow down in the U.S. and European economies. However, the LME prices would be supported by the expected decline in production due to shut down of some of the smelters in the U.S. on account of prohibitive power costs. The reduction in LME stocks is also expected to support the LME prices in the near to medium term future.

On the domestic front the demand for aluminium is expected to grow by around 5-6 per cent annually on account of expected growth in the construction, transportation, consumer durable and packaging sectors. Also the expected GDP growth in the range of 6-7 per cent, increasing disposable income in the hands of the growing Indian middle class population and advent of newer applications further strengthen the demand prospects of the domestic aluminium industry.

Corporate Bureau

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