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Novelis IPO: A potential booster for Hindalco

February 29, 2024 13:12 IST

Base metals major Hindalco’s overseas subsidiary, Novelis, has submitted a draft registration with the US Securities and Exchange Commission (SEC) for the proposed public offering of promoters’ shares.

Hindalco

Photograph: Vivek Prakash/Reuters

Novelis' sole shareholder, AV Minerals (Netherlands) NV, is a 100 per cent subsidiary of Hindalco. Novelis would not receive any proceeds from the sale.

Assuming SEC clearance could go through in about 6 months.

 

It is not stated how much of a stake is to be put on the block.

The monetisation proceeds could be used to fund ongoing capex for Novelis’ Bay Minette facility.

The company recently stated that costs for the expansion escalated by 65 per cent to $4.1 billion and work was a year behind schedule.

If the cash received from the IPO is routed to this, it could boost returns.

However, Hindalco has a strong balance sheet with about Rs 3,400 crore in cash and cash equivalent and it did not have issues funding the enhanced capex.

So, it’s possible the proceeds could be held for possible acquisitions.

At the end of Q3FY24, Novelis had a net debt of $4.6 billion.

With its ongoing capex, net debt may rise to $5 billion by FY26-end.

Hindalco’s consolidated net debt was Rs 34,840 crore at Q3FY24-end.

Hindalco revised the return expectations from Bay Minette to lower double-digits compared to the mid-teens projected earlier due to the delay and higher costs.

A vast majority of the capex is expected to be incurred in FY25 and FY26.

Novelis accounted for 62 per cent of Hindalco’s consolidated assets and 66 per cent of all its liabilities in 9MFY24.

Novelis' contribution to Hindalco consolidated revenues was 63 per cent in 9MFY24 and 65 per cent in FY23, and its contribution of around 56 per cent to PBIT in 9MFY24.

While earnings have grown faster than the rest of the group, the Return on Assets is slightly lower over the last 7 years.

Based on these details, we can derive an implied market cap of $9.6 billion or about Rs 361 per share at Hindalco’s current price.

This is close to an estimate of $9.7 billion, which was calculated in March 2023 by an analyst.

In May 2007, Hindalco bought Novelis for $6 billion and in 2020 Novelis bought Aleris for $2.8 billion.

Given the timeline and the uncertain details of the IPO, it’s hard to provide a concrete case for the rerating of valuations.

Peer analysis of similar listed businesses in value-added aluminum products also doesn’t provide a big case for valuation upgrades.

But the IPO may be sentimentally positive and it could boost returns if the proceeds are meaningfully deployed.

Investors will need to monitor for key details — an IPO valuation that exceeds the $10 billion mark could be bullish, for example.

Hindalco’s shares saw a boost in opening trades, jumping to Rs 535 before retracing to near the prior session’s level of Rs 512.

Leading indices though were down by 0.6 per cent on February 21.

According to Bloomberg, two analysts have ratings on Hindalco since Tuesday — one has a hold with a one-year target price of Rs 508, and the other a buy with a target price of Rs 600.

Before that, 13 of 16 analysts polled in February had been bullish on the stock.

Their average target price is Rs 579, indicating a potential upside of 13 per cent.


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Devangshu Datta
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