In 2007, Hindalco acquired Atlanta-based Novelis Inc – a much bigger company with revenues three times larger than that of its acquirer. The markets disapproved. Hindalco’s shares tanked 14 per cent on news of the deal. Apart from the high price ($6 billion), Hindalco had to take on the $3.5 billion debt in Novelis’ books.
Why does Hindalco feature here? Hindalco acquired Novelis at the peak of a commodities boom – aluminium prices were at their record levels. The Novelis acquisition would give Hindalco production technology in manufacturing tin can sheets (think Pepsi and Coke cans). The pricing for this product was 30-40 per cent higher than base grade aluminium. But there was one fine print. Novelis had entered into a supply contract with Pepsi and Coca Cola – capping any upsides to aluminium price rise. This would remain in effect till December 2009.
Meanwhile global aluminium prices have fallen. The December 2011 quarter saw Ebit fall 33 per cent despite higher volumes. Also, coal, caustic soda and petroleum prices are all up.
Where does it go from here? Hindalco is executing its $6.5 billion plan to triple its alumina and aluminium capacity by 2016 in stages. Its Utkal Alumina, Aditya Aluminium and Mahan plants are expected to be completed by H2CY12. Hindalco has refinanced Novelis’ debt enabling it to post a turnaround. Novelis’s debt now stands higher at $4.8 billion versus $2.5 billion, but spread over a longer term.
What should you do? The Novelis turnaround has already been factored. Bigger concerns include lower LME prices, high input costs, delay in its alumina and captive coal projects and high debt. These concerns may continue to weigh in on Hindalco. Sell.
This article was originally published on June 07, 2012.
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