The Mettle For Metal

BEHIND the large headlines that screamed from the front pages of financial dailies lies a mystery that's yet to be unravelled: why should Sterlite Industries want to buy a 20 per cent stake in Indian Aluminium (Indal), when there's no way that it can get its hands on the company? With a 35 per cent stake in Indal, the Canadian aluminium major Alcan will still remain the largest shareholder and call the majority shots. Including management control. So why is Anil Agarwal, the homegrown entrepreneurial success story, willing to dole out Rs 90 per share of Indal?

Says Tarun Jain, chief financial controller, Sterlite: "This could enable a useful strategic alliance between Sterlite and Indal." The Rs 936-crore cables and copper-based Sterlite also wants to forge a long-term business relationship with India's third-largest Rs 1,021-crore aluminium company. This is part of Sterlite's ambitions to become a leading player in the non-ferrous metals business. Finely drafted mega plans.

Only, Indal and Alcan had no clue. Sitting in his Calcutta head office, Tapan Mitra, vice-chairman and managing director, Indal reacts with surprise: "Believe me, we had absolutely no idea that Sterlite was about to make this offer." He speaks for Alcan as well. Of course, there are rumours about Alcan not being happy with the way Indal is being run; about differences of opinion between Mitra and S.M. Dutta, the non-executive chairman, and former boss of Hindustan Lever; about Suresh Thadani, the Alcan man replacing Mitra. On his part, Mitra acknowledges the rumours, but says: "There is not a grain of truth in them."

The truth is that Indal has not been performing as well as it was. Over the last five years, while sales have increased by 68 per cent to Rs 1,021 crore, the bottomline, after more than doubling in 1996, retraced its trajectory the next year, and stands at where it was in 1993. Net profit margins are a mere 4.5 per cent, and the results for 1998 are expected to be worse. In contrast, the performance of Sterlite has been sterling: over the last five years, sales are up 3.6 times to Rs 936 crore, operating margins have remained above 20 per cent, and the net profits have trebled to Rs 126 crore.

Jain elaborates on Sterl-ite's future plans: "We can add value by working with Indal." No fix on plans yet, but the general direction will be towards setting right the imbalances in metal capacity and captive power," something that Indal has been fighting against for years.Making aluminium from bauxite is an extremely power-intensive business, and Indal has been suffering in recent times from not having enough captive power to fuel its manufacturing. No wonder, this one-time blue-chip stock that quoted up to Rs 300, was trading at around Rs 65 per share.

Until Sterlite happened. Agarwal started his bid with an offer of Rs 90 per share to Indal shareholders to get a stake of 10 per cent in the company. On SEBI's advice, he has upped his offer to 20 per cent. In just three days, the Indal scrip has shot up 26 per cent to Rs 82. A good time to sell for short-term investors in Indal, for the short-term future of this stock is uncertain.

The issue is not whether Sterlite has the cash to buy this lot: altogether, this purchase will cost the company Rs 128 crore.That should not be too much of a problem. The profits of 1997 alone will take care of that. The question is: who will the financial institutions finally back? These institutions control 36 per cent of Indal's Rs 71-crore equity. If Sterlite gets the 20 per cent stake, it will be the third largest shareholder—after Alcan's 35 per cent.

That's a tricky one. The current management has some things going for it: a performance record that goes back decades, and the current downturn in fortunes could be part of the global recession in alum-inium. But Sterlite too has some: within a short span of just 10 years, it has already emerged as a powerful player in the copper and telecom cables business, with a sound management. And is cash rich. Last year, it bought Madras Aluminium as a run-up to its larger nonferrous ambitions.

Just who the institutions decide to back will finally determine who runs Indal in its 60th year: an Indian or a Canadian.
with Nikhil Mookerji