Hindalco secures caustic soda supply

Aluminium major Hindalco may reap two kinds of benefits from Aditya Birla Chemicals' acquisition of the chloro chemicals unit of Kanoria Chemicals.

One, caustic soda is a key input in the manufacture of aluminium and this buyout may allow Hindalco to source almost its entire requirement of caustic soda from Aditya Birla Chemicals (ABC), its subsidiary.

This buyout is expected to more than double ABC's caustic soda capacity to 2,20,000 tonnes.

Caustic soda is a crucial input to produce alumina from bauxite, with a tonne of caustic soda being utilised to produce between 11 and 12 tonnes of alumina.

Caustic soda has consistently ranked among the top three raw materials, by value, for Hindalco over the last three financial years, with the company spending around Rs 330 crore on just over 178,000 tonnes of caustic soda in 2009-10. Hindalco's 56 per cent stake in Aditya Birla Chemicals provides it a hedge against swings in caustic soda prices.

Hindalco's rationale for the deal could be to guard against highly volatile caustic soda prices which are up around 20 per cent this year.

The buyout makes all the more sense since Hindalco plans to double alumina production capacity over the next two years. Controlling 220,000 tonnes should enable the company to hedge roughly half its requirement of caustic soda by 2012-13.

Two, the deal may be justified as ‘value-for-money' on a replacement cost basis, as ABC may have had to shell out much more than the Rs 830-crore it paid Kanoria Chemicals, to set up a greenfield caustic soda unit with similar capacity.

However, weighed against this, listed players in the chloro alkali business do tend to trade at valuations below their replacement cost. Kanoria Chemical's chloro alkali arm has been valued at Rs 830 crore.

Gujarat Alkalies, which has four times the caustic soda capacity of Kanoria, has a market cap of Rs 1,100 crore.

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