Kumar Mangalam Birla’s Hindalco is selling part stake in cash cow Novelis. Will it benefit investors?
Getty Images
Kumar Mangalam Birla, chairman, Aditya Birla Group.
Synopsis
Hindalco is expected to raise up to USD5 billion from the sale of a part stake in Novelis. However, investors and analysts are puzzled as to how the proceeds of the sale will be utilised, especially since th reinvestment of funds in capex or acquisitions in the past has had a limited impact on stock performance.
It’s been an eventful month for Kumar Mangalam Birla’s Hindalco Industries. After gaining twice as much as the benchmark equity indices in the last one-year period, Hindalco shares tanked 16% to INR507 apiece in mid-February in just five trading sessions after its US subsidiary Novelis reported a significant capex overrun in one of its projects. Last Wednesday, Hindalco’s stock jumped 5% in intraday trade to hit INR536, a day after Novelis filed
It’s been an eventful month for Kumar Mangalam Birla’s Hindalco Industries. After gaining twice as much as the benchmark equity indices in the last one-year period, Hindalco shares tanked 16% to INR507 apiece in mid-February in just five trading sessions after its US subsidiary Novelis reported a significant capex overrun in one of its projects.Last Wednesday, Hindalco’s stock jumped 5% in intraday trade to hit INR536, a day after Novelis filed for an initial public offering (IPO) with the US Securities and Exchange Commission (SEC). However, the excitement about the company’s listing, 17 years after it was acquired by the Indian aluminium and copper producer, was short-lived. Hindalco shares lost 2.5% and closed at INR505 on Monday as investors and analysts remained puzzled over the company’s decision to raise funds by divesting a part of its stake in a business which accounts for 65% of its consolidated earnings before interest, tax, depreciation, and amortisation (Ebitda). Moreover, Hindalco is cash-positive, and its India business has net cash reserves of INR3,632 crore with a net debt-to-Ebitda ratio of just 0.37x as of December-end 2023, point out analysts.So, why is Hindalco building a war chest?Cues from the pastTo be sure, Novelis will not receive any funds from the IPO as most of the proceeds will go to its Indian parent. “Hindalco can use the cash proceeds on any of the following — inorganic acquisition; funding India capex to expedite domestic project; pay a one-time dividend to shareholders; or setting up a vehicle to fund Novelis’s capex,” Aditya Welekar, senior research analyst – metals & auto, Axis Securities, tells ET Prime.Hindalco has said in the past that the company’s India capex will be funded through internal accruals. But what about inorganic acquisitions? 108021643In an interview with a TV channel in May 2023, Hindalco managing director Satish Pai said that the company would “look closely” if Hindustan Copper were to come up for disinvestment. Since the Novelis IPO is expected to take at least six months to complete, it could coincide with the new government at the Centre speeding up the divestment process. According to market data platform Statista, since the pandemic-triggered meltdown in 2020, global copper prices have risen by an average 38% while aluminium is up 29%. The demand for copper in India has witnessed strong growth on account of a sharp economic recovery after the pandemic, especially in sectors such as infrastructure, construction, telecom, renewables, and electric vehicles where copper plays an important role. Hindalco’s India business comprises both upstream (mining and production) and downstream (value-added products) operations in aluminum while it has only a downstream presence in copper. As mentioned above briefly, while Novelis contributed 65% to Hindalco’s consolidated FY23 Ebitda, the remaining came from its India business. Of late, Hindalco’s downstream copper business, which has delivered a record performance in terms of revenue growth in FY23 as well as the first nine months of FY24, has turned out to be a substantial growth driver for the company.Analysts tracking Hindalco expect Novelis to be valued between USD13 billion and USD15 billion. While some forecast that Hindalco will raise around USD1 billion (INR8,288 crore) from the share sale, Mumbai-based broking firm KR Choksey Shares and Securities said in a recent note that it expects Hindalco to sell 30% stake in Novalis for USD5 billion (around INR41,441 crore). “Something demanding such a high level of capital commitment can either be for organic growth (expansion) with an upstream element, or for an inorganic acquisition opportunity,” says Amit Dixit, lead analyst - metals, logistics, and defence, ICICI Securites, adding, “There is room for backward integration in the copper business”.Backward integration?Hindustan Copper currently has a market cap of INR25,437 crore while the government has a 66% stake in the public sector undertaking. It is the only company in India engaged in the mining of copper ore and owns all the operating mining lease for copper ore. Presently, the Miniratna is focusing on mining and beneficiation operation while selling copper concentrate as the main product.Hindalco managing director Pai said on an investor call earlier this month that the company’s copper business is witnessing good demand on account of electrification. “I think that structurally, copper is going to be good going forward. I do expect when the competition… comes in, we may see some pressures on the copper prices”.Backward integration (with the potential acquisition of Hindustan Copper) could lead to better cost control for Hindalco’s downstream copper business, which the company is keen to develop further. However, mining is usually a capital-intensive business and time-consuming. Large upfront investment and long project timelines usually result in suppression of return on investment. On the other hand, in recent quarters the demand for aluminum in India has been showing signs of weakness. Novelis’s value-added aluminum products business has been doing the heavy lifting of late, but that vertical is grappling with its own set of challenges with the capex for its Bay Minette project overshooting the initial cost estimates by 65% to USD4.1 billion, putting stress on Novelis. Novelis’s net debt-to-Ebitda ratio stood at 2.65x as of December-end 2023, but Hindalco wants to execute the Bay Minette project by maintaining this ratio under 3x. 108021654Self-reliant subsidiaryWith its business getting listed, Novelis will gain access to equity markets and may not have to rely on its parent for fund raising.In terms of acquisitions, too, Novelis’s portfolio of products now caters to all major segments including automobiles, beverage cans, and aerospace.In 2020, the Georgia-based company had completed the acquisition of aluminium rolled-products producer to enable its foray in the aerospace segment, which accounted for 3% of its shipments in the first nine months of FY24. In comparison, the automobile segment contributed 22% of the revenues while this figure stood at 56% for beverage cans. The final cutSince the delisting of Novelis in 2007 following its USD6-billion acquisition by Hindalco, the US company’s revenue has doubled to around USD18.5 billion as of FY23. During the same period, however, Hindalco shares have jumped 3x as against Nifty50’s 5x gain. While the Novelis deal helped Hindalco do forward integration, the company’s next acquisition might be aimed at further strengthening its position in the copper business. But will it result in gains for Hindalco shareholders?Well, if historic performance is any indication, any substantial outperformance post the big-ticket buyout has been elusive for the stock. (Graphics by Manali Ghosh)