Demand recovery boosts Novelis’ turnaround
Valuation at $12bn, hig her than rival Alcoa; company rules out any plan to list it
Aditya Birla Group chairman, Kumar-Mangalam Birla puts the valuation of his Hindalco Industries’ fully owned American subsidiary, Novelis, at $11-12 billion.
Hindalco acquired Novelis in 2007 for $6 billion; Birla says the company returned equity worth $3 billion back to its promoter within three years.
“Our real capital invested in Novelis, therefore, was about $3 billion. The value of Novelis today would be $11-12 billion. The acquisition also helped Hindalco move towards more of value added products, which has higher margins and faces less volatility due to London Metal Exchange prices,” he said, soon after announcing the acquisition of US-based Aleris Corp for $2.6 billion.
The data shows a sharp turnaround in Novelis’ finances over recent quarters, in line with a recovery in global metal demand and a rally in metal prices.
The company reported net profit of $636 million during the year ending March, against one of $45 mn the previous year. Earnings before interest, taxes, depreciation and amortisation (Ebitda) or operating profit, a key measure in the capitalintensive metal industry, was up 12 per cent over a year to $1,215 million in 2017-18. Net sales (or revenues) were up 19.5
per cent, to $11.5 billion.
The improvement in earnings has had a positive impact on Novelis’ balance sheet and its net worth (or shareholder equity) turned positive for the first time in four years. The figure was $823 million at the end of March, against a negative net worth of $77 million at the end of March 2017.
This is good for the parent, Hindalco, and the AV Birla Group, working hard for nearly a decade to make money on their initial investment. Steve
Fisher, president and chief executive of Novelis, says the improved financial metrics support the valuation. “It can easily be a multiple of 8.5 times of Ebitda, of such a high-end, downstream business,” said Fisher.
However, say analysts, this appears on the higher side when compared to peers. Alcoa Corporation’s was $8.05 billion as of Friday. The market value of Alcoa and other metal companies fell after the US government slapped duties on imported aluminium. Alcoa’s shares are down 19 per cent this year since January, due to the ongoing trade war between the US and Canada, the European Union and China. Alcoa, global leader in alumina, bauxite and aluminium products, also lowered its earlier projection of adjusted Ebitda to $3-3.2 billion, from a previous estimate of $3.5-3.7 billion, it said on July 19.
Analysts say once the cloud over a trade war subsides, Hindalco should list Novelis, to unlock value in the and also get a correct valuation.
“The listing would then reflect the value of Novelis in Hindalco’s share price, which is currently missing,” said one, asking not to be named. However, when asked, Birla said: “There are no plans (for a listing) in the near future.” Novelis plans to merge Aleris Corp with itself once the acquisition is complete in the next nine to 15 months, company officials said.
Analysts have valued Hindalco on an FY20 enterprise value to Ebitda-based sum-of-the parts approach, with a multiple of 5.5 times for the India business (in line with average valuation for global peers) and seven times for Novelis,” said an HSBC analyst in a note to its clients, with a target price for the share of ~320. On Monday, Hindalco’s shares closed at ~211, down 1.3 per cent. The stock has lost 23 per cent of its value this year.