Mar 04 2024, 07:55
Hindalco is selling part stake in cash cow Novelis. Will it benefit investors?
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 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.
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".
source: et
Mar 04 2024, 08:12