Business Standard - April 14, 2014

Novelis: Debt overshadows profit

Ujjval Jauhari  |  Mumbai  

April 14, 2014 Last Updated at 22:37 IST

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Read more on:    Novelis | Hindalco | Acquisition | Lme | Cagr

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Hindalco's acquisition of Novelis in 2007 for around $6 billion has been one of the largest acquisitions in the industry. Hindalco, which had entered into an agreement in February 2007 for acquiring Novelis, completed the acquisition in May the same year, making the combined entity the world's largest rolled-aluminium producer. Clearly, it added significant scale and size to Hindalco's operations that were largely focussed on India.

The acquisition intended towards forward integration has since then been accruing positives despite challeng-ing business environment. Novelis has cushioned downside in earnings during the crisis as Hindalco felt the heat of downturn in the base metal (aluminium and copper) prices. Per tonne aluminium prices on the LME (London Metal exchange) that were at $3,000 plus levels in FY08 have slumped to sub $2,000 a tonne levels. The price of copper, too, has been quite volatile and from more than $8,000 a tonne levels in 2008, trades at less than $7,000 a tonne levels now. In the backdrop, while on standalone basis Hindalco has seen its revenues grow at 6.63 per cent CAGR (compounded annual growth rate) during FY08-13, the company's PBIDT (profit before interest depreciation and tax) has contracted at four per cent CAGR while profits have fallen by almost 10 per cent CAGR during the FY08-13 period. However, helped by Novelis' contribution on a consolidated level, the company has managed to see its operating profits in the positive terrain growing 3.86 per cent CAGR with profits growing 6.65 per cent FY08-13.

Moving forward, copper and aluminium prices on the LME are seen falling 3.3 per cent and 1.3 per cent CAGR between FY13-16, as per estimates of analysts at ICICI Securities. Novelis is likely to outperform Hindalco's domestic sales in terms of earnings before interest tax depreciation and amortisation (Ebitda) growth, say analysts. Novelis' Ebitda is estimated to grow by 10.4 per cent CAGR during FY13-16 compared to Hindalco's standalone Ebitda growing 6.28 per cent CAGR during the same period. Hence, the world's largest producer of rolled aluminium and a major recycler of aluminium cans Novelis will continue driving Hindalco consolidated profitability in the coming days, too. However, the high debt (taken to buy Novelis and expand Indian capacities) have played spoilsport and curtailed profit growth at the consolidated level. The debt-equity ratio at 1.6 is still high and needs to be cut to comforting levels. Positively, with developed economies seen growing, expect demand for Novelis' products to remain stable, as the company is also looking at expanding its value-added product portfolio.