When metal maker Hindalco Industries Ltd made the multi-billion-dollar purchase of Novelis Inc. last year, the markets worried if the company had bitten off more than it could chew.
Now, with the debt market tightening further, the acquisition is costing much more than analysts had estimated.
According to an analyst with a foreign brokerage, many weren’t expecting any equity dilution to fund the transaction. At worst, some analysts were expecting a 20% dilution.
Tough times: Hindalco MD Debu Bhattacharya.
Keeping that in mind, Hindalco’s decision to dilute equity by 33% through a rights issue came as a negative surprise. It’s no wonder then that Hindalco’s shares have corrected by 8.4% since the company disclosed late last week that it was considering a rights issue, or the sale of stock to existing shareholders.
Hindalco has said it will raise up to Rs5,000 crore through the rights issue, or a little less than 40% of the entire fund requirement to replace the $3 billion (Rs12,900 crore today) bridge loan taken last year to fund the Novelis deal.
By raising some funds through the equity route rather than completely depending on debt, it would save Rs280 crore in interest costs on a post-tax basis. That’s based on an assumption of an interest rate of 8% and a tax rate of 30%.
According to Bloomberg, consensus estimates for Hindalco’s earnings for the year till March 2010 stand at Rs2,520 crore. The interest cost savings, therefore, would lead to an 11.1% increase in net profit estimates.
But with equity dilution being as high as 33%, earnings per share estimates may be revised by as much as 17%.
But also note that the equity route will considerably reduce the debt burden of the company.
With the current mood in the markets, however, large equity dilution is seen as a big negative.
At current levels, the stock has fallen 27% from its highs in January, slightly less than the drop in the broad market.
What has worked in the company’s favour is that aluminium prices have remained firm at around $3,000 a tonne, up substantially from the $2,400-levels in late January.
If aluminium prices continue to be firm, the stock could recover some of its losses, now that the uncertainty about long-term funding for Novelis has cleared.
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