Final clearances to Novelis Inc. for acquiring Aleris Corp. end the overhang over parent Hindalco Industries Ltd’s stock. After a sharp 50% drop so far in 2020, the stock rose 6.6% on Thursday.
But the deal may not be much value-accretive for Novelis, which has to divest Aleris’s Lewisport plant in 9-12 months. The Duffel, Belgium plant will be bought by Liberty House. While Novelis still has to find a buyer for the Lewisport plant, it will receive $340 million for the Duffel plant.
Even after factoring in receipts from the sale of the Duffel plant, Novelis will have to take on considerable debt. In fact, the acquisition is expected to cost Novelis about $2.2 billion. This would raise Hindalco’s consolidated debt by about ₹16,500 crore.
Without the two plants, however, the acquisition does not offer much operating leverage to Hindalco. After the Aleris deal, consolidated earnings before interest, tax, depreciation and amortization (Ebitda) is expected to shrink about 14.5% year-on-year in FY21 due to the lockdown, according to analysts at Kotak Institutional Equities.
As a result, Hindalco’s consolidated net debt-to-Ebitda levels will mount considerably. While the company will be able to service the debt from existing operations, if the lockdown continues for significantly longer, it could raise concerns. “With interest coverage of 2.5 times and free cash flow generation, we see the near-term spike in leverage manageable. Nonetheless, increase in leverage is discomforting given downside risk to earnings in FY2021E if covid-19 led disruptions extend beyond one quarter,” said Kotak analysts in a client note.
Additionally, some consumer segments, such as automobiles, were already decelerating. The pandemic has further impacted the business of rolled aluminium products.
“Management expects a decline in 2020 due to softness in Europe and inventory rightsizing in North America. The impact from the covid-19 pandemic would be over & above this, but is difficult to quantify currently. This will hold true for Novelis’ 2020 auto volumes as well,” said analysts at IIFL Securities Ltd in a client note.
Beverage can volumes have bucked this trend for now. They continued to enjoy decent demand as individuals have been stocking beverages during the lockdown. Headwinds could arise when consumer spending sees some stress in beverages. Aerospace, has been facing headwinds as planes are grounded.
Besides, falling international aluminium prices could keep up the pressure on investors. While this steep correction may have already priced in some of the dislocations caused by the pandemic, any recovery will be prolonged.
