Birla Said to Seek $2.7 Billion Debt Refinance: Corporate India

Hindalco Industries Ltd., India’s second-biggest aluminum maker, is seeking improved terms on as much as $2.7 billion of debt as projects funded by the rupee loans come on stream, said two people familiar with the talks.

The company, controlled by billionaire Kumar Mangalam Birla, wants to refinance loans worth 177.75 billion rupees ($2.7 billion) in the year ending March 31, said the people, asking not to be identified as negotiations are on. One of the new smelters started trial output last quarter, while the other is slated to start production in October.

Hindalco, whose debt swelled 39 percent to 569 billion rupees as of March 31, is seeking to reduce interest costs that are eroding profit. The Mumbai-based company’s shares slumped 20 percent this year as local sales fell to a two-year low and profit, excluding unit Novelis Inc, fell in six of the past seven quarters. A 15 percent drop in the rupee since end-March is buoying earnings as it sells the lightweight metal at dollar-denominated prices.

“If companies can refinance or restructure their debt under current high rate regime it will be a big boost for them in terms of lowering of costs,” said Alex Mathews, head of research at Geojit BNP Paribas Financial Services Ltd. in Kollam, southern India. “With a strong promoter-backing, Hindalco has a very high chance of getting lower rates from refinance.”

Spokeswoman Pragnya Ram didn’t respond to an e-mail seeking comment on the refinancing.

New Projects

Hindalco shares fell 0.2 percent to 103.80 rupees at close in Mumbai, after an 11 percent rally yesterday. The benchmark S&P BSE Sensex rose 1.1 percent. Of the 50 analysts who track the stock, 20 recommend buying, while 17 favor selling, according to data compiled by Bloomberg.

The company will face higher costs at the new projects as it doesn’t have all the raw material linkages in place yet, said Bhavesh Chauhan, a Mumbai-based analyst at Angel broking Ltd. Any supply shortage would delay the production ramp-up, he said.

“Given the current interest rate scenario, I don’t think the company will be able to secure big savings in costs,” said Chauhan, who has a neutral rating for the stock.

The yield on 10-year bonds sold by top rated Indian firms has risen 195 basis points since the end of May as the U.S. signaled a paring of stimulus and Indian policy makers and the central bank engineered a cash crunch to support the rupee.

Falling Currency

The rupee slumped the most among Asian currencies this year, while the benchmark bond yield touched a 12-year high this week. The Reserve Bank of India tightened cash in the financial system since mid-July to stem the rupee’s slide.

Hindalco’s smelter at Mahan in the central state of Madhya Pradesh started trial output last quarter, while the Aditya project in eastern Odisha state is slated to begin production in October.

The company raised 99 billion rupees in September, 125 basis points more than the then base rate of the State Bank of India to fund the 132 billion-rupee Aditya project. In March 2011, the company agreed to borrow 78.75 billion rupees at 1.75 percent more than the prevailing SBI base rate, for its 105 billion rupee Mahan Aluminium project.

Debt Restructure

SBI Capital Markets Ltd. restructured 550 billion rupees of debt in the year ended March 31, an almost 17-fold increase from 33 billion rupees two years earlier, according to Supratim Sarkar, the Mumbai-based head of structured finance at the investment banking arm of India’s largest lender.

SBI Capital Markets, Citibank NA, Royal Bank of Scotland NV and Kotak Mahindra Bank Ltd. were the lead arrangers for the Mahan borrowing. The risks involved in executing large projects reduce considerably after the commissioning and helps lower interest costs through refinancing of loans taken to build them, the people said.

Last month, the company refinanced 50 billion rupees loans at its alumina unit that would save 1.5 billion rupees annually. The refinancing of loans related to unit Utkal Alumina International Ltd. was settled at 10.15 percent against an earlier rate of 13.2 percent, Managing Director Debnarayan Bhattacharya said in a presentation on Aug. 13.

Loan Flexibility

Hindalco was able to negotiate flexibility in the loan agreement as project-execution risks were over, Bhattacharya said in the presentation. The revision of terms was achieved in tough market conditions, even after measures by the central bank choked off rupee liquidity, he said.

The Utkal, Mahan and Aditya projects were part of Hindalco’s $5.5 billion capital expenditure plan started in 2009 to double annual smelting and refining capacities to 1.3 million tons and 3 million tons, respectively. The Mumbai-based company may start production at a 359,000-ton plant in Odisha next quarter, Bhattacharya had said that day.

Higher capacity, the falling rupee and stagnating local demand is prompting Hindalco to increase overseas sales. Hindalco is seeking to quadruple exports of the lightweight metal, while output may rise 34 percent to 725,000 tons this fiscal year as more capacities get added, two people familiar with the strategy said in July.

“Hindalco continuously looks at cost-saving avenues including reduction of interest expenses,” Chief Financial Officer Praveen Maheshwari said on Aug. 13. Raising dollar debt is not attractive right now given the current volatility in the rupee.’’

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