A13 Non Ferrous Metals

Group Members:

Space for evaluation and remarks by Faculty

RemarksHind Zinc and Gujarat Introflux show outlier interest rate position needs recheck or explanation of the phenomenon.

Focus is conservative, the way it needs to be.

Marks/Grade Assigned

Signature of Faculty

A13 Non Ferrous Metals

Industry Rating: Non Ferrous Metals

Factor Score Rationale

Demand Supply Gap 4 Demand growth stable and high, but strongly linked with economic growth

Government Policy 4 100% FDI, Low Production efficiency

Extent of Competition 5 Highly concentrated, monopolistic industry –eg Hindalco, Sterlite, Nalco

Supply Side risks 2 Scarce input availability and mining related risks

Return On Capital Employed 3 Average RoCE is 17.62%

Operating margins 6 Average Op. Margin is 31.8%

Variability of operating margins 5.5 Volatility is 5.3

Growth in Operating Margins 2 Avg. growth in operating margin is -0.79%

Rating 3.9375 Marginally Favourable

Qn1 Workings:

Key Characteristics & Risk Factors: The most important environmental factors affecting the industry favourably and adversely

Cost of undertaking trade and retaining profits: The rising burden on costs is mainly due to the higher wages due to pay revision of Public sector workers and employing and retaining talent for the private sector has had its effects on the bottom line. Increase in land acquisition costs, royalty rate and inefficient system of operation are all adding up to the reduced profit level.

Global context: Certain global challenges laid out are imposing super profit taxes, resource rents, fees of licensing, levies on environment and certain quotas have left the non-ferrous metal industry in disorder. Shortage of qualified professionals in this industry is also a major cause of concern. This global context affects the industry in an adverse way.

Regulatory pressure: Certain important regulations that come into play are due to the land acquisition bill, MMDR amendment bill and the relief and rehabilitation bill. All these levy heavy pressure on the regulatory norms surrounding the non-ferrous metal industry.

Growth of other emerging countries: The growth of other emerging economies with lower energy prices, lower social and lower environmental costs have become a huge factor of competition. India is constrained by the regulatory factors and also the availability of abundant resources in this industry and this is the turn of certain other economies to capitalize on these gains that they possess.

High local demand: The main forte of the non-ferrous metal industry has been the high local/domestic demand that has been generated by the usage. This has led to the companies in the industry overcome various regulations to produce such metals. The per capita consumption of Aluminium has improved from 0.5 kg to 1.3 kg presently.

A13 Non Ferrous Metals

Advancement by Indian companies: Certain parameters that contribute in this front are the rapid capacity expansion of input minerals, emerging indigenous industrial expertise and also effective cost reduction techniques. These contributes to the heavy competition in the industry. In addition, this segment is seen as a potential for heavy investment and good returns by many private players who have begun investing in this industry.

Past performance Recent Developments and Trends and outlook: short (one year) and medium (two to three years) term outlook for industry.

The heavy regulations of the government has laid heavy constraints on the different companies (public and private). Though the per capita consumption has increased for these metals, in comparison to the global scenario it is on a miniscule level. This does not provide high demand from the local market. The production of non-ferrous metals have fluctuated in spite of a heavy demand in the local market. This has led to the decrease in the growth pattern of the various companies. One of the important concept that has played a major role in this industry is recycling. The advantage of the non-ferrous metals is their ability to be recycled. A large number of new players are beginning to set up units in order to capitalize on this opportunity. Scraps are being considered as the input for these companies. This is an emerging trend in this industry which further supplements the industry. Certain important parameters that will gain importance over the next three years are: maturity of the industry and the value chain, high rate of recovery from scrap, high skilled force, development of technology etc.

Main locations in India for the industry.

Hindalco: Mumbai, Aluminium and CopperNalco: Orissa, AluminiumSterlite: Tamil Nadu, CopperVedanta: Mumbai, Aluminium, Copper and zinc

Identify top and bottom (three to five) companies in the industry on the basis of observed financial parameters. ((Tol/TNW, CR, NCFO/Total outside liabilities, Bank Borrowing, Average Interest Rate, Commission etc. paid to banks, Ratings if available)

Top 3 Companies TOL/TNW CR NCFO/TOL Bank Borrowing

Average Interest Rate

Hind Copper 0.322 2.24 0.761 0 0

Hind Zinc 0.0988 3.56 1.49 0.39 74.61

Gujarat Introflux 0.375 2.988 0.431 1.87 29.94

Bottom 3 Companies

TOL/TNW CR NCFO/TOL Bank Borrowing

Average Interest Rate

Nissan Copper 0.50 3.53 0.04 180.02 13.67

BilPower 1.38 2.62 -0.04 96.38 20.31

Baroda Extrusion 3.23 0.72 -0.555 41.83 14.53

A13 Non Ferrous Metals

Focus for your bank – total quantum of financial exposure proposed: Identify companies (at least one per group member) other than the ones mentioned above that can be good target market for the bank and their financial requirements. Based on this, how much financial exposure your bank can budget for the current year, what other business opportunities you can foresee and what revenue do you expect to generate from the identified companies.Assumptions:

Total Advances and deposits will grow at the same rate as the previous years Average Lending Rates will remain around 13.2%, maintaining the same spread above PLR Non-Interest Income-to-Total Income remain around 10% for the bank

Projected Total Advances for F.Y 20X2 : 13800 Crores (@20% growth in total advances)

As the industry is cyclical in nature and the demand is stable with the growth tied to growth in the economy, the short term to medium term outlook of the industry is only marginally positive. The total quantum of exposure for this sector should be around 3% of total expected advances as there could be other profitable industries that could require growth funding.

Since the industry risk rating is only marginally positive, the bank should focus on lending To individual companies having favourable credit ratings/risk ratings of more than 4 For a period not exceeding 3 years No individual company should get more than 25% of the budgeted sectoral exposure on account of

average industry outlook, with the exception of companies showing highly favourable individual risk ratings.

Hence, total sectoral exposure budgeted for the following financial year 20X2 is, 3% of total expected advances, which is 414 Crores

Exposure for individual companies targeted in the sector is allocated proportional to its risk rating. The table shows the budgeted exposure for some select companies in the sector.

S. No

Company Name Risk Rating Maximum Exposure favourable for bank

(a) In Crores

Maximum Feasible Borrowing for Company

(b) In Crores

Budgeted Exposure

Min (a,b) In Crores

1 Hind Zinc 5.43 89.26 113.86 89.262 Guj Intrux 4.53 74.39 24.54 24.543 Cubex Tubings 4.1 67.2 88.04 67.24 Sterlite 3.9 64.12 27882 64.125 Precision Wires 3.875 63.67 410.17 63.676 RamRatna 3.375 55.41 22.824 22.827 Others NA 40 - 408 Estimated Interest Income (@13.2% of Advances) 43.779 Estimated Non Interest Income (10% of Interest Income) 4.37710 Estimated Total Revenues from the sector 48.15

Qn 5& 6 Workings: