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Why Novelis’ acquisition of Aleris is good news for Hindalco

Satya Sontanam BL Research Bureau | Updated on July 27, 2018

Novelis’ acquisition of Aleris will help parent Hindalco insulate itself further from the cyclicality in the aluminium industry and the volatilities of the LME (London Metal Exchange). Like Novelis, Aleris too is primarily in the downstream aluminium products business.

This can act as a hedge to Hindalco’s predominantly upstreae m aluminium business. The Aleris acquisition will also give Novelis a presence in aluminium supply to the construction and aerospace segments.

Consolidation

It will add about one million tonne to Novelis taking the group’s total capacity to around 4.7 million tonnes of downstream facilities. The chunk of Aleris’ revenue comes from North America (51 per cent) and Europe (45 per cent); it also has some presence in the Asia-Pacific region. The company is a strong player in the high-margin automotive segment and will help Novelis consolidate its presence in this market.

In FY 2018, Novelis contributed about 56 per cent to the group’s operating profit of ₹15,025 crore. The acquisition of Aleris is expected to increase this share. The management expects Aleris to contribute about $360 million (nearly ₹2,500 crore) in annual operating profit, after deal closure.

Debt-funded acquisition

The $2.58-billion cash deal has valued Aleris at about seven times its forward EV/Ebitda (enterprise value/earnings before interest, tax, depreciation and amortisation). The acquisition will be funded by way of debt to be raised by Novelis. The current debt in the books of Novelis stands at $3.5 billion. Strong and free cash flows ($406 million in FY 2018) aided by favourable market conditions, give Novelis room for further leverage to fund the acquisition.

While the additional debt could increase Novelis’ total debt to about four times EBITDA levels post-acquisition, the management expects moderation in the ratio in a couple of years with growth and synergy benefits.

On a consolidated level too, Hindalco has headroom to fund the acquisition — its net debt of ₹39,000 crore at the end of FY 2018 translates into a reasonable net debt-to-EBITDA of 2.8 times.

Published on July 26, 2018

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