Overseas firm Novelis Inc.’s financial performance continues to remain a matter of concern for investors, with the chief worry being the negative free cash flow of $541 million (Rs2,699.6 crore now) in the first nine months of the current fiscal year.
The 100% subsidiary of Hindalco Industries Ltd has debt worth $2.8 billion on its books, which it has to service out of its own cash flows. Hindalco’s debt covenants with its bankers bar it from contributing to Novelis’ debt servicing needs.
The concern, according to an analyst with a foreign brokerage, is that Novelis may have to take on more debt to fund the cash burn. These worries are reflected in Novelis’ public debt instruments, which trade at a 44% discount to face value in the US. The instruments have a coupon (rate) of 7.25%, but buyers can avail of a yield of nearly 13%. Clearly, a risk of default is being factored in.
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As things stand, there are no signs that the overseas company will turn cash flow positive anytime soon.
The company’s well-diversified product portfolio and geographical spread will cushion some of the pain owing to the recession in the developed world, but it won’t stop shipments from falling.
In the December quarter, shipments fell by 14.6%, which, coupled with the drop in aluminium prices, led to a 20.4% drop in revenues.
The sharp drop in aluminium prices does not affect Novelis adversely, because aluminium is a raw material for the firm and what it earns is the pass-through margin.
According to Sunirmal Talukdar, chief financial officer of Hindalco Industries, there is no pricing pressure as far as the pass-through margin goes. According to him, the fall in aluminium prices is a positive for Novelis since the working capital needs come down as a result.
But given the weakness in demand and the tendency of consumers to shift to lower value-add products in times of a slowdown, the outlook is bleak. Novelis is taking efforts to cut costs, which is good, but it remains to be seen if its announced measures will be enough to tackle the recession.
Going by the prices of Novelis’ public debt and the equity shares of Hindalco, the markets don’t seem to be too hopeful of the future.
Graphics by Sandeep Bhatnagar / Mint
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