Skyrocketing prices of aluminium globally, while bolstering the earnings of Hindalco Industries’ pure-play metals business, will, at the same time, negatively impact.
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KOLKATA: Skyrocketing prices of aluminium globally, while bolstering the earnings of Hindalco Industries’ pure-play metals business, will, at the same time, negatively impact the margins of Novelis, the world’s largest-rolled product company that the Aditya Birla Group major acquired in May 2007.
This will mean Novelis would take more time to turn operating-cash positive.
Of course the long term strategic aim of the acquisition had been to hedge earnings risks of Hindalco from low metal prices with higher margins from conversion of metal into rolled product at Novelis.
But an 18% rise in global metal price in March to $2,842 per tonne is expected to be a drag on Novelis’ operating margins, which, in turn, will offset bottomline gains of Hindalco, that will accrue from rising metal prices, according to analysts.
Bijal Shah of brokerage IIFL Cap, in a note on Monday, said each $100/tonne rise in aluminium prices translates into a Rs 1.5 rise in Hindalco’s EPS.
But, conversely, Novelis’ losses widen when aluminium prices go up due to pre-tied can contracts, Shah said.
Such legacy contracts of Novelis, that are scheduled to expire in 2010, have a price- cap clause and such contracts.
The contracts constitute around 10% or roughly around 3,00,000 tonne of its total business, implying that Novelis is not in a position to increase prices and pass on higher price of metal to its customers.
Analysts said the price cap on Novelis legacy contracts stood at $1,800 per tonne —- or a full $1,000 below the current market price.
Hindalco officials could not be contacted for comment.
IIFL’s Shah said due to all this, Hindalco’s EPS rises only one-third of what it could have —- by just 52 paise for every $100 rise.
Novelis, a global leader with shipments of around 3 million tonne of rolled product was justified as a win-win acquisition that would insulate Hindalco from cyclical vagaries of in commodity metal business.
With metal prices showing no such signs in global markets, analysts forecast that Hindalco earnings could see a dilution to the extent of 32%, post consolidation with Novelis. The negative cash flow of Novelis could also hinder debt repayments.
Vandana Luthra and Bhaskar N Basu of Merrill Lynch said Novelis is expected to face slowdown in the US which accounts for 39% of its volume sales.
In a note last week, they said Hindalco had financed its acquisition of Novelis through a bridge loan of $3 billion which is due for repayment in November 2008. The company expects to refinance the bridge loan but this could be challenging given tough credit conditions, Luthra and Basu said. The bull run in metals is, however, well-timed for Hindalco’s volume growth through brownfield expansion that is expected to go on
stream within the next one year.
Alumina production will be ramped up from 1.16 million tonne per annum to 1.5 million tonne per annum while smelting capacity to produce metal will be hiked from 0.46 million tonne to 0.54 million tonne per annum.0.54 million tonne per annum.
d_ajay@dnaindia.net
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