MUMBAI: Kumar Mangalam Birla, the chairman of Aditya Birla Group, will invest Rs 2,165 crore by October to raise his stake by 5% to 37% in Hindalco IndustriesBSE 1.77 %by converting 15 crore preferential warrants into equity shares, a group executive with direct knowledge of Birla's plans said.
The company, India's largest aluminiumproducer, had issued warrants to Birla in March 2012 with a conversion price of Rs 144.35 a piece, a 54% premium to Wednesday's closing price of 93.35.
"The person allotted preferential share warrants is supposed to pay upfront 25% at the time of allotment and balance 75% in 18 months," said Jayant Thakur, a Mumbai-based chartered accountant specialising in securities law. "If he does not exercise the right to convert and pay the balance 75%, then the 25% deposit will be forfeited by the company."
Birla, who has already paid Rs 541 crore in March 2012 to convert 10% of the preferential warrants, will lose the initial deposit if he does not convert all the warrants.
"Birla will convert the preferential warrants into equity shares," another group executive confirmed.
Birla, who owned only 17% of the company a decade ago, has been raising his stake in Hindalco after it transformed itself into the world's largest supplier of aluminium to global can makers following the purchase of Canada's Novelis in 2007.
Birla's Bullish Outlook on Hindalco
Birla converted a part of the preferential warrants in 2007, and a year later purchased unsold shares in the rights issue to raise Rs 5,048 crore to repay a part of the Rs 14,000-crore debt for the Novelis deal. The conversion signals Birla's bullish outlook on Hindalco, which invested $2.6 billion in the past fiscal to expand capacities in India and emerging markets such as Brazil and China.
"Major capex is behind Hindalco. These investments will start generating cash flows in the next few years. In other words, cash flows will outstrip capex from 2015," said Sanjay Singh, metals analyst at brokerage Motilal Oswal. "Though the outlook for the aluminium industry is not so rosy, the cost of production in dollar terms is coming down. From here, the balance sheet can only improve. Hence, promoters have every reason to be bullish about the company's prospects."
Analysts said the capital infusion will also reduce Hindalco's leverage, or debt-to-equity ratio. "The company is sitting on a huge pile of debt. The conversion will help bring down the debt-to-equity ratio," said an expert who tracks conglomerates.
"These investments will not only propel us towards the growth trajectory planned for the metals business, but also create the lowest-cost production bases on the global cost curve - ones that can withstand any phase of the business cycle," Birla told shareholders at the company's annual general meeting.
Hindalco has invested heavily to expand capacities in the past three years. Novelis, for instance, has commissioned a new cold mill at the Pinda plant in Brazil and started an auto finishing line in China.
The company reported an 11.5% rise in net profit at Rs 474 crore during the first quarter, compared with a net profit of Rs 425 crore in the year-ago period. Its sales fell 3% to Rs Rs 5,766.69 crore during the period.
Addressing shareholders, Birla had voiced concerns over debt. "Depreciation and interest burden from expanding capacities will have a bearing on the financial results in FY14," he said. "Nevertheless, the business remains extremely well-placed for the long term, with the addition of these mega-scale assets in our portfolio."