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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

EXECUTIVE SUMMARY The main objective of most privately held for-profit companies is to make money in the present and over the long run. If a company is not able to generate enough economic profit over time, its survival is questionable. Moreover, companies making little or no profit are not very attractive for potential investors looking for returns. Management interested in investors’ satisfaction has to manage cost and economic value while maintaining at least some minimum profitability level. There needs to be a move towards real improvement and value creation as opposed to clever manipulation of financial data for short term performance gains. Increasingly competitive global markets have rendered many traditional performance measurements and reward systems obsolete. The need for organizations

to

adapt

to

today’s

dynamic

and

complex

business

environment in order to remain competitive is clear. In addition, the investment community has increased the pressure on managers to deliver value,

driving

for

more

accurate

and

transparent

performance

measurement. As a result, many organizations have had to re-examine their traditional performance measures and the structure of the compensation schemes that were built around them in the past decade. New measurement techniques are now based on economic theory rather than the accounting framework. But what framework should a company use? And once a new framework is implemented, does it mean that a company should ignore all others? Economic Value Added (EVAÂŽ), a framework developed by Stern Stewart & Co., that is becoming increasingly popular with companies in a wide range of industries. This project aims to determine the EVA of Hindalco Industries Limited and shows how EVA can be used as a financial tool to improve performance and increase the value Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

INTRODUCTION

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

COMPANY PROfIlE

Hindalco Industries Limited, the metals flagship company of the Aditya Birla Group, is an industry leader in aluminum and copper. A metals powerhouse with a consolidated turnover in excess of US$ 14 billion, Hindalco is the world's largest aluminum rolling company and one of the biggest producers of primary aluminum in Asia. Its Copper smelter is the world's largest custom smelter at a single location. Established in 1958, Hindalco commissioned its aluminum facility at Renukoot in Eastern U.P. in 1962. Later acquisitions and mergers, with Indal, Birla Copper and the Nifty and Mt. Gordon copper mines in Australia, strengthened the company's position in value-added alumina, aluminum and copper products, with vertical integration through access to captive copper concentrates. In 2007, the acquisition of Novelis Inc. a world leader in aluminum rolling and can recycling marked a significant milestone in the history of the aluminum industry in India. With Novelis under its fold Hindalco ranks among the global top five aluminum majors, as an integrated producer with low cost alumina and aluminum facilities combined with high-end rolling capabilities and a global footprint in 12 countries outside India. Its combined turnover of US$ 14 billion, places it in the Fortune 500 league.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

HINDALCO'S BUSINESSES: Hindalco in India enjoys a leadership position in aluminum and copper. The company's aluminum units across the country encompass the entire gamut of operations from bauxite mining, alumina refining, aluminum smelting to downstream rolling, extrusions, foils and alloy wheels, along with captive power plants and coal mines. The Birla Copper unit produces copper cathodes, continuous cast copper rods along with other by-products, including gold, silver and DAP fertilizers.

AlUMINUM Hindalco is the world's largest aluminum rolling company and one of the biggest producers of primary aluminum in Asia. In India, Hindalco enjoys a leadership position in specialty alumina, primary aluminum and downstream products. Hindalco's major products include standard and specialty grade alumina and hydrates, aluminum ingots, billets, wire rods, flat rolled products, extrusions, foil and alloy wheels

COPPER Hindalco's Birla Copper unit at Dahej in Gujarat is the world's largest single location custom copper smelter with 500,000 tpa capacities. The plant is backed by captive power plants, oxygen plants, as also by product facilities for fertilizers and precious metals. A captive jetty with cargo handling capacity of over four million TPA facilitates easy input of copper concentrate and other imported raw materials.

MINES Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD The two copper mines in Australia were acquired in 2003. Birla Nifty mine consists of an open-pit mine, heap leach pads and a solvent extraction and electro winning (SXEW) processing plant, which produces copper cathode. Birla Nifty's copper cathode capacity is 25,000 TPA. A copper sulphide deposit is located at the lower levels

of

the

Nifty

open

pit

mine

and

an

underground mine and concentrator have been developed to mine and process ore from this deposit. The Nifty sulphide operation commenced ore production from stopping in December 2005 and concentrate production in March 2006. With the start-up of the Nifty sulphide operation and its progressive ramp up during FY2007, Aditya Birla Minerals (ABML) is entering a period of rapid growth.

PRODUCTS Hindalco is a leading domestic player in two metals business segments — aluminum and copper. Products:

Aluminum Chemicals

Primary Aluminum

Aluminum rolled products Aluminum foils Copper

Aluminum Extrusions Aluminum alloy wheels

DAP/NPK Complexes Precious metals

Others

The aluminum division's product range includes alumina chemicals, primary aluminum ingots and billets, wire rods, rolled products, extrusions, foils and alloy wheels.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD The company has a significant market share in all the segments in which it operates. It enjoys a domestic market share of 42 per cent in primary aluminum, 63 per cent in rolled products, 20 per cent in extrusions, 44 per cent in foils and 31 per cent in wheels. As a step towards expanding the market for value-added products and services, Hindalco has launched several brands in recent years, which include Aura for alloy wheels, Freshwrapp for kitchen foil and Ever last for roofing sheets. Our exclusive showroom, The Aluminum Gallery, seeks to promote Hindalco products to its customers. It is a platform for the company to showcase quality 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's products are well received not only in the domestic market, but also in the international market. The company's metal is accepted for delivery under the high grade aluminum contract on the London Metal Exchange (LME). The company exports about 17 per cent 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 major market share in the country. These specialty products find wide usage in diversified industries including water treatment chemicals, refractoriness’, ceramics, cryolite, glass, fillers and plastics, conveyor belts and cables, among others. The company also exports these alumina chemicals to over 30 countries covering North America, Western Europe and the Asian region. Birla Copper, Hindalco's copper division at Dahej in Gujarat, enjoys a leadership position in India, having built over 40 per cent of the domestic market share within three years of its commissioning. It has also made Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD successful forays into the export markets of the Middle East, Southeast Asia, China, Korea and Taiwan. The copper plant produces world-class copper cathodes, continuous cast copper rods and precious metals. Sulphuric acid, phosphoric acid, diammonium phosphate, other phosphoric fertilizers and phosphor-gypsum are also produced at this plant.

HINDALCO BUSINESSES — SHArE Of NEt SALES vALUE 2006-2007:

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

StrAtEGIC OBJECtIvES: The Company recognizes that the conduct and effectiveness of an organization are mainly anchored to the quality of its workforce. In order to fulfill its purpose and to achieve its objectives the company requires commitment and dedication of its employees who place high value not only in the interest of the company but also in the interest of other individual entities. The other objectives are as follows:  To operate at a level of profitability, this will ensure the long term economic viability of the company by providing a return on equity, which compares favorably with other industries of similar capital intensity and risk which will enable the company to attract adequate to support its growth.  To aspire towards a high level of operating, technical and marketing excellence, and to make the optimum use of assets, this will ensure a strong competitive position in the markets served by the company.  To strive to satisfy customers by integrating their needs into the company products and services with efficiency and professionalism and to give the best value to them by promoting quality products.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD  To improve the process of managing the company affairs through proper

planning,

timely

implementation

of

plans

and

regular

performance reviews.  To sustain an organization of able and committed employees and to provide them with opportunities for growth and advancement.  To foster a culture of innovation with the application of new ideas and methods to solve business problems and seize opportunities.  To recognize and seek to balance the interest of shareholders, employees, customers, suppliers, government as well as the public at large.  To uphold the highest standards of integrity in the conduct of all phases of business.

fUtUrE OUtLOOk: The company‘s business strategy is to ensure profitable growth in the future, which will be through:  Realization of synergy gain with Hindalco to ensure better market position, combining Indal’s strengths in Alumina and downstream segments with Hindalco‘s advantage in primary metal.  Higher assets utilization across plant location, particularly leveraging the benefits of the upgraded rolling mills as well as taking steps to optimize use of idle physical infrastructure assets and enriched product mix for higher returns from existing assets.  Strengthening of exports with an emphasis on consolidating Indal‘s presence in existing market while tapping new regions for export of

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD value added product viz., especially alumina and downstream sheet, foil and extrusions. ď ś Cost control efforts including better logistics, higher operating efficiencies and improved working capital management.

PrODUCtION CAPACItY:

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

DIvISION Alumina chemicals

CAPACItY 1,160,000 tpa

Primary aluminum

489,000 tpa

Extrusions

27,700tpa

Rolled products

200,000 tpa

Wire rods

64,400 tpa

Aluminum foil

11,000 tpa

Aluminum wheels

300,000 pcs

Power

1087.2 mw

Copper cathodes 500,000 tpa ** Additional 17,000 tpa thick gauge

LOCAtION 700,000 tpa (Renukoot) 110,000 tpa (Muri) 350,000 tpa (Belgaum) 373,000 tpa (Renukoot) 1,02,000 tpa (Hirakud) 14,000 tpa (Alupuram)1 19,700tpa (Renukoot) 8,000 tpa (Alupuram) 80,000 tpa (Renukoot) 45,000 tpa (Belur) 45,000 tpa (Taloja) 30,000 tpa (Mouda) 40,000 tpa (Renukoot) 10,000 tpa (Alupuram) 14,400 tpa (Mouda) 5,000 tpa (Silvassa)** 6,000 tpa (Kalwa) Silvassa 741.7mw (Renusagar) 78 mw (Renukoot) 267.5 mw (Hirakud) Dahej foil capacity at Silvassa

1. Alupuram capacities have been de-energized and are not included in working capacity 2. For Taloja recycling plant

MANAGEMENt: BOARD Of DIRECTORS ďƒ˜ Mr. Kumar Mangalam Birla, Chairman Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

 Mrs. Rajashree Birla  Mr. C. M. Maniar  Mr. E. B. Desai  Mr. S. S. Kothari  Mr. M. M. Bhagat  Mr. K. N. Bhandari  Mr. A.K. Agarwala  Mr. N.J. Jhaveri  Mr.Debu Bhattacharya, Managing Director ChIEf fINANCIAl OffICER Mr. S. Talukdar, President and Chief Financial Officer COMPANY SECRETARY Mr. Anil Malik BUSINESS / UNIT hEADS  Mr. Shashi K. Maudgal, Chief Marketing Officer  Mr. Shankar Ray, President, Chemicals & Intl. Trade  Mr. Satish M Bhatia, President, Foil & Wheel  Mr. R. S. Dhulkhed, Head Operations  Mr. D.K. Kohly, Chief Officer Operations, Renukoot Unit  Mr. V S Kasbekar, Executive President - Copper

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD ADITYA AlUMINUM Mr. S. N. Bontha, CEO

UTkAl AlUMINA INTERNATIONAl lTD Mr. H. R. Pattanayak, MD & CEO

NOVElIS INC. Ms. Martha Finn Brooks, President & COO

ADITYA BIRlA MINERAlS lIMITED Mr. D. Bhattacharya, Chairman

COMPANY SECRETARY Mr. Peter Torre

HIStOrY Of tHE PLANt: The INDAL (Now Hindalco) plant at Belgaum was established in 1968 and started operations on the 7 th November 1970. It is situated about 10 Kms,

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD from Belgaum City, beside the National Highway. It has a total area of 1250 acres. This was the only unit of INDAL, which started with both the facilities – Alumina Plant and Smelter Plant.

The main products of this unit are

Alumina Hydrate, Calcimined metallurgical grade alumina and Specialty grades of alumina and Hydrate.

The Alumina Plant was set up with a

capacity of 1,60,000 tons of Alumina per year. Smelter Plant had a capacity of 73,000 tons of metal per year. Due to the hike in the power rates, the plotlines in the Smelter had to be de-energized in 1995. The subsidiary of Smelter Plant- Carbon Paste and Block Plant is still in operation. Owing to increased demand of hydrate, alumina and Specialty chemicals in the export market, the Alumina Plant was expanded in several stages and currently operates at about 3,40,000 tones of Hydrate (as Alumina ) per annum. The Specials Plant- a branch of Alumina plant manufacturing specialty grades of hydrate and Alumina is being operated at 60 KT per annum. The raw material-Bauxite is brought from Durgamanwadi Mine 120 Kms, from Belgaum.

About 70% of the total productions are exported.

The

Carbon Paste and Block Plant is operated using imported raw materials (Carbon Pitch Coke) from Korea. Marketing of Hydrates and Alumina is a major business objective, both at the domestic and International Levels. Since both alumina & hydrate find wide usage in diverse industries such as high-grade refractors, Zeolite, alum, plastics, paper, industrial ceramics and high-tension insulators etc. All business unit of Hindalco are ISO 9002 certified & upstream units of mines, alumina plants, smelter power plant& one downstream extrusions units

has

attained

the

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14001

Environment

Management

System Page 14


A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD certification. It is also an ISO 18001 (Occupational Safety and Health system). hINDAlCO

BElGAUM

WORkS

has

also

got”

National

Energy

Conservation Award” from the Government of India in the year 2000. Vertically integrated through all stages of aluminum business from bauxite mining, refining, smelting to semi-fabricated products (Indal) Hindalco has moved from being metal maker to value creator.

vISION, MISSION & vALUES: VISION:

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD To be a premium metals major, global in size and reach, with a passion for excellence.

MISSION: To relentlessly pursue the creation of superior shareholder value by exceeding customer expectations profitably, unleashing employee potential and being a responsible corporate citizen adhering to our values.

VAlUES: INTEGRITY: Honesty in every action. 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 QUALItY POLICY QUALITY is the cornerstone of Hindalco Mission which being customeroriented, is committed to excellence and cost-effectiveness. Quality lies in Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD continuous improvement and in redesigning systems, processes and practices to satisfy customer needs and expectations. It extends to manufacturing, maximizing operational efficiency, capacity utilization and productivity. It involves the integration of human resources, a key to teamwork.

ThE OBjECTIVES Of OUR QUAlITY POlICY ARE:  To meet the expectations of customers, and improve response time.  To ensure reliable and consistent customer service.  To provide value for money and to be internationally competitive.  To choose and associate with suppliers to ensure high quality of inputs; through proactive interaction with them, to secure their participation in our quality improvement process.  To establish a healthy system for quality assurance and improvement, with emphasis on in-process control in order to ensure error prevention. Do things right the first time.  To formulate quality goals for all functions and to foster teamwork.  To satisfy "internal customers" as a means to external customer satisfaction.  To educate, motivate and involve employees in the fulfillment of the quality goals.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

COrPOrAtE ENErGY POLICY StAtEMENt: Hindalco is committed to continuously improve energy conservation is all activities, products & services relating to aluminum & for its sustainable growth for future generation.

TO MEET ThE ABOVE GOAlS, COMPANY WIll STRIVE TO:  Adopt cleaners & efficient energy sources for all our operation.  Reduce

wastage

&

improve

productivity

to

minimize

energy

consumption.  Benchmark with the best in business & install system & practices to match them.  Produce high quality with higher conductivity metal to minimize energy losses.  Recognize efforts of our employees & their family members in energy conservation initiatives.  Create awareness & Motivate all concerned in improving energy efficiency throughout the life cycle aluminum products.  Enhance use of renewable energy/waste hear wherever feasible.  Minimize transmission/transit losses.  Incorporate energy efficient designs & technology in all future project/ acquisitions.  Work with suppliers, customers & other relevant parties for promoting the use of recycled aluminum.  Set up an effective energy performance assurance process.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

HINDALCO ENvIrONMENt POLICY “We, the employees of Alumina plant at Belgaum, while implementing the corporate environmental policy are committed to operate with environmental performance meeting legal standards, through continual environments in pollution prevention measures”.  Surpass legal standards, wherever it is economically viable.  Reduce exposure to employees to dust, fumes and noise in Work places like bauxite handling area, kiln and special Product area.  Intensify efforts for conserving key resources like furnaces Oil electricity and water, by strengthening operational Controls and management practices.  Mitigate environment impacts arising out of red mud handling and storage.  Strengthen management practices for handling treatment and reuse of liquid and solid waste, primarily spent oils, domestic effluents, process and plant scrap.  Enhance the green cover in and around the plant premises through plantation of trees and ensuring their survival and growth.  Educate and motivate suppliers, customers and on-site contractors for contributing to implementing of the policy.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

tHE

BELGAUM

WOrkS

IS

DIvIDED

INtO

tHE

fOLLOWING

DEPArtMENtS: In all there are around 634 employees, who include the

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD management,

workers

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these

all

are

full

time

enrolled

people.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

MATERIAl MANAGEMENT DEPARTMENT: Material management is the responsible for the coordination of planning, purchasing and moving, storing and control of material in an optimum manner so as to provide a pre-decided service to the customer at minimum cost. The term material management is relating to the activities like. ďƒ˜ Purchasing & logistic section. ďƒ˜ Store keeping / Inventory control section.

PURChASING & lOGISTIC SECTION: To procure materials as per the requirement indicated in purchase requisition for regular functioning of alumina plant, carbon paste, within the required time and optimum cost for acceptable quality of products. The material received by purchase department is delivered to store department. The Material Receiving Receipt (MRR) is sent to bills department where they will arrange for the payments.

STORE kEEPING / INVENTORY CONTROl SECTION: The objective of this department is to receive, store, preserve and deliver the maintenance spares safety equipment and items of general use. Stores department must supply the raw material to the concerned department as per the demand of the required department. After the materials are issued the receipt goes to costing department for further calculation. All the 30,000 materials are coded by numeric, alphabetic, alphanumeric by the stores head.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

PRODUCTION DEPARTMENT: To produce a standard alumina as per the quality and agreed production plan, Hindalco at Belgaum unit works for 24 hrs in a day. It is split into 4 shifts as 1, 2, 3 and general shift. Head of the production is responsible for the production, planning & quality of the product. Production of alumina goes as per the demand given by the sales department.

The

Annual production of the plant stands at 3,50,000 tons per annum. Major Raw materials required for the process are 1. Bauxite 2. Furnace oil 3. Caustic soda All the above three raw materials, including electricity accounts to 70% of the cost of production. Out of total production 60% of the production is exported and 40% is sold within India. The working capital requirement for the plant is 50 to 60 corers the other overheads includes administrative overheads the logistics, repairs and selling’s.

SAlES DEPARTMENT: Sales coordinator actively begins after head office raises the sales order and sends three copies to the respective department. One copy is sends to the traffic department, second copy is sent to accounts department and another copy is sent to dispatch section. Monthly requirement of the material is sent to the production department by head office on the basis of the demand a production planning chart is Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD prepared by the PPDC department, which is sent to production department. The order is dispatched on the said delivery date and the works branch collects the payment. If any complaint is received by the customer personal meeting is held with customers and complaints are tried to be solved.

MARkETING: Hindalco has no marketing division at Belgaum, all the units work independently, and for the sales and marketing there are separate centers which co-ordinate with all the units and look into the sales and marketing of the products. The sales office is in Bangalore, Delhi, and Hyderabad.

fINANCE (ACCOUNTS DEPARTMENT): This department handles all financial transactions, costing and billing operations negotiation process, maintaining and preparing various invoices, payments and receipts are the two major areas of operation done by this department. In addition taxation cash loan normal and statuary payments expenses, this section handles advances and other operations relating to banks.

OPERATIONS: The main operations are based in the CPBP, Alumina and special products. These departments are the core for the manufacturing of Alumina carbon block, carbon paste and special products. These departments comprise of smaller departments and each of these 3 major departments has a department head. The majority of the people are working in Alumina, CPBP and Special products departments, and the work is carried out in shifts.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

RESEARCh AND DEVElOPMENT: Hindalco’s R&D centers at Belgaum and Taloja are recognized by the department of Scientific and industrial research (DSIR). The Belgaum R & D center carries out studies on ores, alumina and specially grades and carries out overseas assignments in collaboration with ALCAN. The R & D lab has the status of “Center of Excellence” for predicting organic behavior in refineries. A joint technical development program with ALCAN is under execution in the field of raw materials. Both the R & D centers have attained ISO 9001 & 9002 certification, with the Belgaum R&D center having recently adopted the revised ISO 9001:2000 standard. Over the last five years, about rupees 560 million has been spent on R &D – a testimony to Hindalco’s commitment towards developing new applications for alumina/aluminum, optimizing manufacturing process and ensuring environmental friendliness.

hUMAN RESOURCE (hR): Belgaum works has a separate HR Department, which looks into the daily administration and also into the specific and nifty gritty of the company; it is the bridge between the production, employees, management and the outside world. This department is concerned with implementation of the plans, with the welfare of the plant, with the industrial relations and above all safety and security of the plant and the work force is its prime concerns. This department looks after the subsidiaries like recruitment selection training and induction, canteen community development disciplinary actions ESI, welfare, security, guesthouse medical facility etc.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

MANUfACtUrING PrOCESS: Production of Alumina primarily involves two important raw materials Bauxite and Alumina bearing ore and electric for which an abundant supply is necessary. Bauxite is an ore formed by the weathering of Aluminum – bearing rocks. The ore us obtained by a quarrying operation, which includes ripper dozer. About 2.8 tones of Bauxite are required to make one tone of alumina. This involves chemical processing of the or into Alumina by a method called the BAYER PROCESS. At the Alumina Plant, the crushed Bauxite is mixed with a solution of Caustic Soda and then digested in large pressure vessels.

Caustic Soda

dissolves the Alumina present in the Bauxite. This process is called DIGESTION. Classification the solution containing Alumina is separated, by setting filtering, from insoluble solid impurities such as Iron Oxide, Titanium and Silica.

The resulting residue commonly called red mud is discarded and

sent to the red mud pond. During PRECIPITATION, the clear liquor is pumped into large tanks called precipitators.

After ‘seeding’ with fine

crystalline particles of Hydrated Alumina produced earlier, circulation is started through airlift pipes.

During circulation, new crystals formed by

cooling separate out of the solution. After sufficient Alumina has separated, the crystals are settled and washed free of Caustic liquor. The final stage in refining is called CAlCINATIONS. After precipitation the Hydrated Alumina contains approximately 1/3 of its own weight of combined water, which is removed to obtain alumina free from water molecules. This dehydration process is achieved by heating the Alumina on

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD oil-fired rotary calcimine Kilns, where the material is subjected to a temperature of about 1400 degree centigrade.

ALUMINA PrODUCtION PrOCESS: BAUxItE

SCrEENING /

WEt

rECEIPt

CrUSHING

GrINDING

PrECIPItAtION

DIGEStION

MUD tHICkENING

fILtrAtION

& WASHING

SPENt LIQUOr USED fOr SEEDING

fINES

CLASSIfICAtION

COArSEr WASHING

HYDrAtED fILtrAtION

CALCINAtIONS Babasabpatilfreepptmba.com

ALUMINA

SILOS

DISPAtCH

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

WOrLD CLASS MANUfACtUrING ACtIvItIES: WCM is a competitive strategy that aims for shareholder's value creation enough focus on sustainable and superior QCEIP performance and other parameters. The objective of our WCM initiative is to successfully compete with any organization in which every employee from top to bottom is working towards making that organization the best in its particular field. It is based on the idea that each person is an expert in his or her own job, and by synergizing the collective thinking power, creativity and job knowledge of everyone in the organization, we can accomplish this objective. One cannot seek cultural change in a businesslike manner. It is not something that can be bought or installed like computer software. Developing a culture is like planting a garden. It takes time. It requires vision, planning and systematic & disciplined application of skill and efforts. One could understand that the task is by no means easy, as part of the problem is duality of WCM philosophy that stresses both on Instrumental and the inspirational. The inspiration is essential for sustaining the initial flush of enthusiasm. MAIN PURPOSES Of WCM WORkShOP ARE:  Build up the Top Management Will, thus getting a Commitment from them.  To introduce and proliferate the concepts, tools and techniques of World. Class manufacturing at all levels.  Develop Leads (known as Champions of Change) to further proliferate the WCM Concepts in plant once the Conference cum Workshop is over.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

WCM (WOrLD CLASS MANUfACtUrING): A main aspect of the company is moving towards building a WCM unit in the organization. Below is the WCM model of the company.

WCM Model for Excellence and Competitive Advantage

8 Information, Systems/BPR, Technology and Cash Flows

2 Work Environment 3 (5S) JIT / Supply Chain Management

Quality & Quantity Cost Delivery Innovations & Intellectual Capital Productivity & Pride

7 Liaison, Team Force and Skill Development

6 Quality First: Six Sigma/SQM & Best Practices

S h a re

n s p ir a t io n & C o m p e t i tio n m s-I

1 Waste (MUDA) Elimination

, S tra te gy & L ead e rs h ip

Tea

u lt u r e & P a s d se t , C s io n n i M

is sio n M n, si i o V

4 Equipment Effectiveness/ TPM

5 Customer Driven: Internal and External

h o l d e r ’s V a l u e

EIGHt DIMENSIONS: Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD 1. WASTE ElIMINATION (MUDA): Waste is anything which customer does not look for or pay for. Any activity, which is not adding any value to business, is considered as MUDA.

2. WORk ENVIRONMENT (5S): It stands for good housekeeping concepts and is considered the basis for continuous productivity and quality improvements Respect standards and cultivate good habits.

3. jUST IN TIME: The prime goal of Just in time is the achievement of Zero Inventories not just within the confines of a single organization but ultimate through.

4. EQUIPMENT EffECTIVENESS / TPM: It is an innovative approach to maintenance that optimizes equipment effectiveness, minimizes waste promote zero accidents, zero breakdowns, and zero pollution - through team activities involving all levels of employees.

5. CUSTOMER DRIVEN (INTERNAl & EXTERNAl): This dimension ensures customer delight; both internal as well as external it enables understanding of customer expectations of our products / services. 6. STRATEGIC QUAlITY MANAGEMENT (SQM): It is the process of

establishing long-term quality goals and defining the approach to meet these goals. It is centered on quality based on the participation of all its members and aiming at long-term success through customers sat is faction and benefits to the members of organization and society. SQM is developed, implemented and led by the upper management. Here, we integrate quality into strategic planning.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD 7. lIAISON

AND

UNDERSTANDING:

Liaison

is

co-

ordination/communication between the two extreme ends, liaison needs proper scheduling to achieve the satisfaction of your customer liaison' and understanding therefore is most essential. The need for liaison and understanding is to meet the immediate demand of the market. 8. INfORMATION, SYSTEMS, TEChNOlOGY AND CASh flOW: Keeping up to date with information from various sources the suppliers, customers, competitors, employees and other stake holders is extremely necessary for managing the business systems for effective manufacturing, continuous up-gradation of technology and effective cash flow are the basic requirements of WCM.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

SWOt ANALYSIS Of HINDALCO INDUStrIES LIMItED, BELGAUM WOrkS STRENGThS: 

Integrated Operations from Bauxite Mining, alumina Refining & Specials

Dominant Player in Domestic Market in specialty Alumina & Hydrates

Established Export Presence in 30 Countries

Among the Best in Specific Energy Consumption in Alumina Industry

WEAkNESS: 

High Exposure to Furnace Oil as major Source of Energy Input

High Cost of State Grid Electrical Energy & supply interruptions

Higher Cost of Logistics & Inward and Outward Material movement 100% by Road

OPPORTUNITIES: 

Growing Specialty Alumina and Hydrate Market

Changes In Specialty Market Structure with 2 Major Global Players Vacating the Market

Growing Metallurgical Alumina Demand

ThREATS: 

Inadequate Bauxite Reserves for operations Both at Current Level & for Expansion

Cyclical Metallurgical Alumina Prices Causing Wide Fluctuations in Profitability

Cyclical & Rising Furnace Oil Prices

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

fINANCE DEPArtMENt At HINDALCO, BELGAUM UNIt:

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD The main activity of the finance department is to keep all the accounts of the financial matters. It is responsible for maintaining up to date accounts. The various activities are allocated to different sections. The costing section determines the costs incurred on various items in relating to consumption and management information system is adopted in this department for work efficiently. They deal with only working capital management with various banks of the Belgaum city. Excise section files periodic returns under acts like central tax, etc. This section carries out all the activities concerned with the excise. Pay roll section prepares the pay sheet. They keep accounts of the raise in pay, bonus, and deduction in salary of an each employee. The net salary of each employee is tabulated here. Cash and bank section deals with day to day cash transactions. This section issues Cheque to suppliers after the instruction are given by the bills payable section. It also makes the reconciliation statement of bank and customers. It also provides all records to the internal and external auditors. Bills payable section verifies the purchase bills and receives the debit notes and credit notes as per the instruction of the purchase department. Sales invoice section looks after both Indian & abroad market. There are 3040 grades for sales invoice. Transaction with the foreign countries can be done with the help of clearing agents. Sales officers negotiate the matter. Execution of sales order is done by on-line base. Hindalco at Belgaum works sends all the figures to the Head office for the further calculation, like preparing balance sheet, profit and loss account, etc.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD The turnover of the Belgaum unit is 850 corers the company is subject to two incentives by Government for exports they advance licensing and duty entitlement pass book.

SOME fACt fILES Of ADItYA BIrLA GrOUP:

Market capitalization of Rs 185 billion (US$ 4 billion) 396,766 shareholders Over 80 per cent of shares dematerialized Over 13 million GDRs issued Dividend of 220 per cent in 2005-06 EPS of Rs 16.8 per share in 2005-06 ECS facility available for dividends Transfer-cum-demat facility Nifty and Mount Gordon copper mines in Australia acquired Aditya Birla Minerals Limited (Hindalco subsidiary) first Indian company to be listed in Australia

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

2007:  In May 2007, Novelis became a Hindalco subsidiary with the completion of the acquisition process. The transaction makes Hindalco the world's largest aluminum rolling company and one of the biggest producers of primary aluminum in Asia, as well as being India's leading copper producer.  Acquisition of Alcan's 45 per cent equity stake in the Utkal Alumina project, thereby making Hindalco the 100 per cent project owner.

2006:  Joint Venture with Almex USA for manufacture of high strength aluminum alloys for applications in aerospace, sporting goods and surface transport industries.  Signed a MoU with the government of Madhya Pradesh for a Greenfield aluminum smelter in the Siddhi district of the state.  Hindalco completes largest Rights Issues in the history of Indian capital markets with total size of Rs. 22,266 million.  Hindalco announces 10:1 stock split. Each shares with face value of Rs. 10 split into 10 shares of Re 1 each.  In May 2006, the company entered into a JV with Essar Power (M.P.) Ltd. to develop and operate coal mines at Mahan, Madhya Pradesh. The JV will supply coal to the proposed aluminum smelter and power complex in Madhya Pradesh.  In May 2006, company's copper mining subsidiary Aditya Birla Minerals Limited (formerly Birla Mineral Resources’ Pvt. Ltd.) came

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD out with an equity offering and subsequent listing on the Australian Stock Exchange (ASX).  In March 2006, the company acquired an aluminum rolling mill and wire

rods

facility

situated

at

Mouda

(Nagpur),

from

Asset

Reconstruction Company (India) Ltd (ARCIL), belonging to Pennar Aluminum Company Ltd.

2005:  All businesses of Indal, except for the Kollur Foil Plant in Andhra Pradesh, merged with Hindalco Industries Limited.  In September 2005, the company split its shares in ratio of 10:1 in order to enhance liquidity and to encourage participation from retail investors.  Aditya Birla Group to set up a world-class aluminum project in Orissa at a project cost of about Rs.11,000 corers.  MoUs signed with state governments of Orissa and Jharkhand for setting up Greenfield alumina refining, smelting and power plants.  Commissioned

Copper

III

expansion,

taking

total

capacity

to

500,000 TPA.

2004:  Scheme of arrangement announced to merge Indal with Hindalco.  Copper smelter expansion to 250,000 TPA.

2003:

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD  Hindalco acquires Nifty Copper Mine through Aditya Birla Minerals Ltd. (ABML, formerly Birla Minerals Resources Pty. Ltd.).  ABML acquires the Mount Gordon copper mines in November 2003.  Hindalco becomes majority stakeholder in Utkal Alumina, a joint venture with Alcan.  The amalgamation of Indo-Gulf's copper business with Hindalco becomes effective from 12 February 2003.  Equity stake in Indal increased to 96.5 per cent through an Open Offer.  Divestment of 8.6 per cent holding in Indo Gulf Fertilizers Ltd.  Brownfield expansion of aluminum smelter at Renukoot to 345,000 TPA.

rECENt ACCOLADES:  Hindalco won the prestigious “D.L. Shah National Award for Economics of Quality” given by Quality Council of India, presented by the President of India, H.E. Dr. A.P.J. Abdul Kalam, on 9 February 2007.  National Energy Conservation Award-2006 was presented by the Ministry of Power, Government of India.  Hindalco Hirakud Complex earned the Pollution Control Appreciation Award presented by the Orissa State Pollution Control Board.  The IT department of Hindalco received prestigious IT certificates BS15000 (IT services), ISO 9001 Software development) and BS7799 (Information security). Hindalco's Renukoot IT function is the first in Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD the Group as well as in India to be recommended for all these certifications in an integrated manner.  The company's fabrication plant’s hot mill team won the prestigious Qualtech Award for their project "Reduction of time in work role change time”.

ECONOMIC VAlUE ADDED

INtrODUCtION:

In a market-driven economy many companies will create wealth. Other firms however will undoubtedly destroy it. Discovering those economic factors that lead to wealth creation and destruction among companies is important to many constituencies, not the least of which is corporate officials and investment

managers.

For

corporate

managers,

wealth

creation

is

fundamental to the economic survival of the firm. The average long-run return on stock markets has been very stable in the past century. The average return has been about 6%-points above the return of long risk-free bond. (With the current interest rates this means about 11% per annum.) Investors can easily achieve the average stock market return in the long-run (diversified long-term investment in stock index). This average stock market return is thus the alternative return on investors’ capital. Losing the alternative return or even a part of the easily available alternative return is losing money. Therefore investors and company owners do not (have to) accept below average returns in the long Babasabpatilfreepptmba.com

Page 41


A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD run from any of their companies. The alternative return establishes a minimum return requirement. Finding the “best” companies and industries in the marketplace is of primary importance to investment managers. With the proper financial tools, portfolio managers may be able to enhance their active performance over-and-above the returns available on similar risk indexed passive strategies. A new analytical tool called EVA is now assisting this wealthdiscovery and company-selection process.

StAtEMENt Of tHE PrOBLEM: The study has been under taken in the organization for the purpose to know the “Economic Value Added (EVA)” of the company for five years

IMPOrtANCE Of tHE StUDY: There are numerous aspects of EVA that makes it an important topic for the study. It is important measure currently being used by several firms to determine whether an existing/proposed investment positively contributes to the owners’/share – holders’ wealth. The EVA is equal after – tax operating profits of a firm less the cost of funds used to finance investments.

A

positive

EVA

would

increase

owners’

value/wealth.

Therefore, only investments with positive EVA would be desirable from the viewpoint of maximizing shareholders’ wealth. To illustrate, assuming an after – tax profit of Rs 40 corer and associated costs of financing the investments of Rs 38 corer, the EVA = Rs 2 corer (Rs 40 corer – Rs 38 corer). With a positive EVA, the investment would add value and increase the wealth of the owners and should be accepted. The computation of the after – tax operating profits attributable to the investment under consideration as Babasabpatilfreepptmba.com

Page 42


A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD well as the cost of funds used to finance it would, however, involve numerous accounting and financial issues. The merits of EVA are: (a) its relative simplicity and (b) its strong link with the wealth maximization of the owners. It prima facie exhibits a strong link to share prices, that is, positive EVA is associated with increase in price of shares and vice versa. However, EVA is, in effect, a repackaged and well – marketed application of the NPV technique of investment decision. But EVA is certainly a useful tool for operationalising the owners’ value maximization goal, particularly with respect to the investment decision.

OBJECtIvES Of tHE StUDY: I as a researcher kept the following main objectives for the purpose of present study, they are as follows  To study and examine the present situation and nature of Economic Value Added.  To analyze the EVA with the help of the financial ratios and identify the strength and weakness of the organization.  To study the sources and uses of the Economic Value Added.

MEtHODOLOGY USED: To fulfill the set of objectives regarding study of Economic Value Added, the researcher collected mainly secondary data, primary data and information was also collected to a substantiate the findings derived from the secondary data.  PRIMARY DATA: Primary data is collected during the course of training through observations and discussions with departmental heads, assistants and officers. Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD  SECONDARY DATA: Secondary data is collected from published annual reports and prospects of the company. The process of data collection is further supplemented by an extensive library conducted in the library of I.M.E.R.

LIMItAtIONS Of tHE StUDY:  The most important limitation of the study is that the study solely depends on the published data and documents such as balance sheet and income statement  It was difficult to obtain confidential data from the concerned department with a view point of secrecy that the company would like to observe.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

vALUE BASED MANAGEMENt: Companies today, more than ever before, are subject to an increasingly higher

degree

of

accountability

towards

their

share

holders.

This

phenomenon is not restricted to the developed markets alone but is spreading rapidly across various developing markets as well. Increased shareholders awareness has resulted in the host of share holder- friendly activities across the world – from transparent rating of fund manager performance in the US, to shareholder association in Australia, to a change in discloser norms in India. Driven by external pressure, companies are busy re-designing their system and processes in order to ensure that managers think and act in terms of shareholders value creation. Instituting value based management in an organization is a powerful means of achieving the desired alignment between management goals and shareholders objectives. Value based management is a sophisticated and insightful way of managing company and business performance to create maximum value for shareholders. It employs a number of evaluative tools that help managers make successful business decisions. These tools measure the performance of the business, estimate and explain changes in stock market performance, and evaluate the likely impact of business plans on shareholder value. Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD Management decision at both operating and strategic levels clearly impact shareholder value. Managerial actions that improve cash flow and profitability will increase business value and thus shareholder value. On the other hand, decisions to make investments in a business that returns below the cost of capital destroy shareholders value. There is a growing need for companies to focus on value based management.

NEED fOr vALUE BASED MANAGEMENt:

Principal- Agent Problems

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

Lack of linkage. From shareholder value. To financial and value creation metrics. To operational metrics. Incentives not aligned with value creation. Managers don’t think like owners. Internal competition for funds. Lack of robust Framework to access Value creation

Shareholder values assumed to be driven by earnings. Primary value drivers buried in plans and not managed. Difficult to make trades-offs between

Unfocused decision making

Stakeholder needs. No common score card.

Solid decision making. Key decisions do not consider value creation. Engineered rather than value driven. Decisions are not focused on the right issues. Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD The most important concern for an organization is to develop a common understanding amongst its managers, regarding the objective of the organization.

This

concern

can

be

addressed

by

grounding

the

management’s objective in terms of shareholder value creation. By this, the organization takes care of the principal- agent problem. Having linked the management’s objective to shareholder value organization needs to define a suitable framework of value based management that captures all the important drivers of value creation, which is consistent across the organization, and provides the right incentives to managers. The value based measurement framework needs to disintegrate into operational levers so that managers can understand how their decisions impact value creation. This will result in improved decision making, both at strategic as well as the operational level. Mainly Value based management tackles the following issues:  Aligns key management processes  Provides a framework for measuring value creation  Transforms decision-making The expected outcomes of a value based management implementation are shown below:  Use of value measure as a tool for improving business performance:  Business managers have common language, which they can use to increase the performance of their business.  Raises the consciousness about the use of capital and focuses managers to increase asset productivity.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD  Management processes are aligned to encourage managers to make value enhancing decisions:  Consistently integrate VBM into key management processes i.e. reporting, planning, capital budgeting, goal setting, incentives.  Motivates managers to systematically take value maximizing decision at both strategic and operational level.  Management thinks consciously about value enhancing decisions  Better alignment of shareholder and management interests.  Conscious effort by management to implement value enhancing initiatives.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

WHAt IS EvA®? Economic value added (EVA) is a performance measure developed by Stern Stewart & Co that attempts to measure the true economic profit produced by a company. It is frequently also referred to as "economic profit", and provides a measurement of a company's economic success (or failure) over a period of time. Such a metric is useful for investors who wish to determine how well a company has produced value for its investors, and it can be compared against the company's peers for a quick analysis of how well the company is operating in its industry. Simply, EVA is a measure of profit less the cost of all capital employed. It is the one measure that properly accounts for all the complex trade-offs, often between the income statement and balance sheet, involved in creating value. EVA is also the spread between a company’s return on and cost of capital, multiplied by the invested capital: EVA = (Rate of Return - Cost of Capital) x Capital Under EVA, each business is effectively charged by investors for the use of capital through a “line of credit” that bears interest at a rate equal to the cost

of

capital.

Therefore,

shareholder

accountability

is

effectively

decentralized into the operating units. EVA simultaneously focuses on both the profit and loss statement and the balance sheet, can be tailored to remedy accounting anomalies that fail to reflect economic value. Finally, EVA sets a required rate of return – the cost of capital – as a hurdle rate below which performance is unacceptable. Therefore, a perhaps more meaningful way for operating managers to think of EVA comes from multiplying through by capital:

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD EVA = Operating Profit – A Capital Charge Where, Capital Charge = Cost of Capital x Capital To summarize, EVA is the only operating measure to account for the many income statement balance sheet trade-offs involved in creating value because of it’s simultaneously focuses on both profit and capital. Under EVA, every business unit is, in effect, explicitly charged for the use of capital through a “line of credit” that bears interest at a rate equal to your cost of capital. This effectively decentralizes shareholder value accountability well into your operations. EVA also sets the expected return, the cost of capital, as a hurdle rate below which performance is unacceptable. This clearly identifies the benchmark to create shareholder value.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

EvA IMPLEMENtAtION StErN StEWArt’S 4MS: MEASUREMENT (M1): The initial step in the EVA implementation process is developing the EVA measure.

Key

adjustments

to

GAAP

accounting

translate

financial

statements from an accounting framework into an economic framework. Although the recommended adjustments vary from industry to industry and even company to company, the overall goal of the EVA measure remains the same—to better capture the economic performance of the measured unit. Adjustments are selected on after weighing factors such as behavioral impact, materiality and complexity. Common adjustments include the capitalization of research and development, operating leases, and unusual items such as restructuring charges. MANAGEMENT (M2): The management phase of the implementation brings EVA into action to drive better decision-making throughout the organization. Included in this component are the review of key projects and the development of spreadsheet- based decision tools to help improve the analysis of business issues, consistency of decision-making, documentation, and approval processes throughout the corporation. MOTIVATION (M3): A key component of any EVA implementation is the creation of incentives that link directly to the creation of shareholder value. By creating an incentive plan based on EVA, managers are rewarded only if they create shareholder

value

through

sustainable

improvements

in

operating

performance. Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

MINDSET (M4): In order to transition employees into a mindset of value creation, a significant effort is made on training and communications. Training of key staff on EVA concepts and corporate finance topics creates a foundation for better understanding. The continued communication of the EVA philosophy and its successful application then builds on this foundation and maintains the momentum of these ideas.

StrAtEGIES tO IMPrOvE EvA:

EvA DrIvErS: StrAtEGIES tO IMPrOvE EvA Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

ADvANtAGES Of EvA: EVA is more than just performance measurement system and it is also marketed as a motivational, compensation-based management system that facilitates economic activity and accountability at all levels in the firm. Stern Stewart reports that companies that have adopted EVA have outperformed their competitors when compared on the basis of comparable market capitalization. SEVERAl ADVANTAGES ClAIMED fOR EVA ARE:  EVA eliminates economic distortions of GAAP to focus decisions on real economic results  EVA provides for better assessment of decisions that affect balance sheet and income statement or tradeoffs between each through the use of the capital charge against NOPAT  EVA decouples bonus plans from budgetary targets  EVA covers all aspects of the business cycle  EVA

aligns

and

speeds

decision

making,

and

enhances

communication and teamwork.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

CALCULAtING EvA: Economic profit can be calculated by taking a company's net after-tax operating profit and subtracting from it the product of the company's invested capital multiplied by its percentage cost of capital. There are four steps in the calculation of EVA: 1. Calculate Net Operating Profit After Tax (NOPAT) 2. Calculate Total Invested Capital (TC) 3. Determine a Cost of Capital (WACC) 4. Calculate EVA = NOPAT – WACC% * (TC)

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

NOPAT ESTIMATION: BEGIN: Operating profit after depreciation & amortization ADD: Implied interest expense on operating leases Increase in lIfO reserve Increase in accumulated goodwill amortization Increase in bad – debt reserve Increase in capitalized research and development Increase in cumulative write – offs of special items. EQUAlS: Adjusted operating profit before taxes SUBTRACT: Cash operating taxes EQUAlS: NOPAT

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

In the above approach to estimating NOPAT, the calculation begins with net operating profit before taxes. This is nothing but earnings before interest and taxes (EBIT) figure on a company’s income statement. To this amount, several EVA-based accounting adjustments are made to move toward a better representation of the firm’s pretax cash operating profit. CASh OPERATING TAXES: Taxes on pretax cash operating profit - as opposed to reported income taxes - must be subtracted from pretax cash operating profit to arrive at NOPAT.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

BEGIN: Reported income taxes SUBTRACT: Increase in deferred income tax account Taxes on non – operating income ADD: Tax subsidy on interest expense Tax subsidy on implied interest expense on operating leases EQUAlS: Cash operating taxes

ASSET APPROACh BEGIN Net (short term) operating assets

2. CAlCUlATING INVESTED CAPITAl: ADD: The following tables show the EVA accounting adjustments that are necessary plant property and equipment in the Net equivalent asset and financing approaches to estimating invested capital.

Intangibles Other assets LIFO reserve Accumulated goodwill amortization Page 58

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Bad-debt reserve Capitalized

research

and

development


Cumulative write-offs of special items Present value of operating leases A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

EQUAlS: Capital

SOURCES Of fINANCING APPROACh BEGIN Book value of common equity ADD EQUITY EQUIVAlENT: Preferred stock minority interest Deferred income tax equity Reserve accounts ADD DEBT AND DEBT EQUIVAlENTS: Interest – bearing short – term debt Babasabpatilfreepptmba.com

Current portion of long – term debt Long – term debt capitalized lease

Page 59


Obligations present value of operating leases A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

EQUAlS: Capital

3. ESTIMATING COST Of CAPITAl The Cost of Capital can be calculated by Capital Asset Pricing Model. The After Tax Weighted Average Cost of Capital can be given by the formula

WACC = Kd (1-T) D/V + Ke E/V

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

SYMBO MEANING l of Debt, Kd can be calculated by using formula Cost

UNIT S

Kd = I/P WACC Weighted average cost of capital %

Where I = Interest P = Principle Required or expected rate of return on equity, or cost of equity

%

Required or expected rate of return on borrowings, or cost of debt

%

t

Corporate tax rate

%

d

Total debt and leases (including current portion of long – term debt and notes payable)

Rs.

e

Total market value of equity and equity equivalents

Rs.

v

Total capital invested in the going concern

Rs.

Ke

Kd

Cost of Equity, Ke can be calculated by using formula Ke = Rf + β x MRP Where Ke = Cost of equity Rf = Risk free rate of return β = Beta of scrip MRP = Market Risk Premium Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

ANAlYSIS & fINDINGS

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

COSt Of DEBt (Kdb) (Rs. in millions) COSt Of DEBt = INtErESt (1 – tAx) / DEBt 03-04 = 1772 (1 - 0.35) / 25646 = 4.49% 04-05 = 1700 (1 - 0.35) / 38000 = 2.91% 05-06 = 2252 (1 - 0.35) / 49034 = 2.99% 06-07 = 2424 (1 - 0.35) / 73686 = 2.14% PArtICULArS

2003 – 04

2004 – 05

2005 – 06

2006 – 07

DEBt INtErESt tAx kDB

25646 1772 0.35 4.49%

38000 1700 0.35 2.91%

49034 2252 0.35 2.99%

73686 2424 0.35 2.14%

EXPlANATION:

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD The Cost of Debt for the year 2006-07 is 2.14%. It is substantially less compared to the cost of debt of previous years because the interest expense has reduced in the year 2006-07.

WEIGHtED AvErAGE COSt Of CAPItAL (WACC) {WACC = (COSt Of EQUItY * PrOPOrtION Of EQUItY frOM CAPItAL) + (COSt Of DEBt * PrOPOrtION Of DEBt frOM CAPItAL) (1 – tAx)}

PArtICULArS

2003 – 04

2004 – 05

2005 – 06

2006 – 07

COSt Of EQUItY

15%

15%

15%

15%

COSt Of DEBt

4.49%

2.91%

2.99%

2.14%

DEBt rAtIO

27.22%

33.17%

33.79%

38.56%

EQUItY rAtIO

72.78%

66.83%

66.21%

61.44%

tAx

0.35

0.35

0.35

0.35

WACC

11.71%

10.65%

10.59%

9.75%

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

WEIGHtED AvErAGE COSt Of CAPItAL

EXPlANATION: The WACC for the year 2006-07 stood at 9.75%. Although it is less than the previous years but it is not reduced considerably and this reduction is due to reduction in the cost of debt.

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD NEt OPErAtING PrOfIt LESS ADJUStED tAx (NOPLAt) (rS. IN MILLIONS) PArtICULArS

2003 – 04

2004 – 05

2005 – 06

2006 – 07

EBIt

14228

20832

23323

37470

LESS: ADJUStED 4979.8

7291.2

8163.05

13114

13540.8

15159.95

24356

tAx @ 35% NOPLAt

9248.2

NEt OPErAtING PrOfIt LESS ADJUStED tAx

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

OPErAtING INvEStED CAPItAL (OIC) (rS. IN MILLIONS) PArtICULArS

2003 -04

2004 – 05

2005 – 06

2006 – 07

fIxED ASSEtS (fA)

52079

69265

76157

84831

WOrkING CAPItAL

14723.56

9582.32

41500.21

37508

OIC (fA + WC)

66802.56

78847.32

117657.21

122339.0

OPErAtING INvEStED CAPItAL

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD

rEtUrN ON INvEStED CAPItAL (rOIC) (rS. IN MILLIONS) rOIC = (NOPLAt / OIC)*100 ROIC for 03-04 = 9,248.2/ 66,802.56 * 100 = 13.8% ROIC for 04-05 = 13,540.8/ 88,847.32* 100 = 15.2% ROIC for 05-06 = 15,159.95/ 1,17,657.21* 100 = 12.8% ROIC for 06-07 = 24,356.0/1,22,339.0 * 100 = 19.91%

PArtICULArS 2003 – 04

2004 – 05

2005 – 06

2006 – 07

rOIC

15.2%

12.8%

19.91%

13.8%

rEtUrN ON INvEStED CAPItAL ECONOMIC vALUE ADDED (EvA) (rS. IN MILLIONS) Babasabpatilfreepptmba.com

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD EvA = OIC (rOIC – WACC) EVA for 03-04 = 66802.56 (13.8% - 11.71%) = 1396.17 EVA for 04-05 = 78,847.32 (17.2% - 10.65%) = 5164.49 EVA for 05-06 = 1,17,657.21 (12.8% - 10.59%) = 2600.22 EVA for 06-07 = 1,22,339.0 (19.9% - 9.75%) = 12417.40 PARTICULARS 2003 – 04 EVA 1396.17

2004 – 05 5164.49

2005 – 06 2600.22

2006 – 07 12417.40

ECONOMIC vALUE ADDED

EXPlANATION:

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD The reason for the substantial increase in EVA for the year 2006-07 is increase in ROIC which is 20%. Although EVA for the year 2006-07 is increased, it is not consistent throughout the years.

fINDINGS: rUPEES IN MILLION PArtICULArS COSt Of DEBt WACC NOPLAt OIC rOIC EvA

2003 – 04 4.49% 11.71% 9248.2 66802.56 13.8% 1396.17

2004 – 05 2.91% 10.65% 13540.8 78847.32 17.2% 5164.49

2005 – 06 2.99% 10.59% 15159.95 117657.21 12.8% 2600.22

2006 – 07 2.14% 9.75% 24356.0 122339.0 19.9% 12417.40

 As cost of debt increases EVA decreases, if the cost of debt increases there will be increase in WACC as a result EVA comes down.  Cost of debt in the year 2003 - 04 was 4.49% and for the 2004 - 05 it was 2.91% as a result EVA increased consequently for the year 2003 – 04 to 2004 – 05.  As cost of equity increases EVA decreases because cost of capital is a specific cost of WACC.  WACC is inversely related to EVA, if WACC increases then EVA decreases and if WACC decreases then EVA increases.

SUGGEStIONS:

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A STUDY ON ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD  WACC should be kept at minimum to obtain more EVA as WACC is inversely related to EVA, if WACC increases then EVA decreases and if WACC decreases then EVA increases.  Although cost of capital is decreased over the years, it is not reduced substantially. Therefore, rigorous actions should be taken to curb the cost of capital.

BIBLIOGrAPHY:  Reports and manuals of eva  Library book – Financial Management (M. Y. Khan & P. K. Jain)  Internet website: www.hindalco.com

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A Project Report on ECONOMIC VALUE ADDED of HINDALCO INDUSTRIES LTD