The Hindu Business Line : Hindalco feels the pressure of Novelis

Kolkata, Nov. 21 Softening of greenback against other currencies and overnight improved closing on Wall Street saw metals and metal stocks perform better on Friday and Hindalco Industries, which owns Novelis, witnessed reversal in its price.

The stock closed at Rs 51.9, a gain of 3.8 per cent over the previous day’s close. However, over a week, the stock fell 8.3 per cent and month-on-month, it fell 19.35 per cent. The Hindalco stock registered its all-time low of Rs 38.05 on October 27.

In view of the collapse in commodity prices and sharp deterioration in demand outlook, analysts have cut the FY-2009 and FY-2010 estimates for Hindalco Industries.

Novelis’ dismal performance in the quarter to September 30 added to the negative sentiment over the Hindalco counter.

Novelis results, which came after Hindalco’s quarterly results, indicated demand contraction from automobile and aviation sectors.

Though Novelis has not yet cut production and reduced staff strength, according to its COO, “The demand outlook is highly uncertain in at least three of our four regions. As needed, we will take suitable actions to adjust our production levels and otherwise appropriately manage our business.”

Losses

The unrealised losses on derivative instruments were $134 million higher than in the prior-year quarter and were net of $61 million of unrealised gains related to derivative instruments that hedge the income statement re-measurement of foreign currency denominated working capital and debt balances.

Novelis’ first quarter (to June 31) result was positively impacted by a $66-million gain on derivatives in first quarter 2009, compared with a profit of $34 million in first quarter 2008.

In addition to the impact of derivatives, the second quarter of fiscal 2009 was unfavourably affected versus the prior-year quarter by $27 million for certain income and expense items associated with fair value adjustments recorded at the date of the company’s acquisition by Hindalco.

The pre-tax impact of these items was primarily driven by the lower accretion of reserves related to unfavourable contracts (recorded at fair value at the date of acquisition) during the second quarter of 2009.

Analysts’ take

According to analysts, Novelis goes through a metal price lag effect, which is the time gap between the purchase of aluminium and the sale of the finished product to the customer. It purchases aluminium at current prices and sells it around a month later at the prices prevailing at that time. Therefore, with declining aluminium prices, the company witnesses a negative price lag effect.

Meanwhile, Hindalco averted a bridge loan rollover through a five-year fresh of $982 in foreign currency loan at 315 basis points over LIBOR. Hindalco had taken the $3.03 bridge loan at 80 basis points over LIBOR in 2007 to acquire Novelis.

It is now apprehended that there would be delays in turning Novelis into profits, while there might be additional burden on Hindalco on account of prized acquisition.

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