A day after Hindalco announced its $6 billion dollar all-cash acquisition of Canadian flat-rolled aluminium products manufacturer Novelis, the stock of India’s largest metal firm lost 13.75% to close at Rs149.45 on the Bombay Stock Exchange. On a day when the exchange’s benchmark Sensex index fell by 2.4%, this had a cascading effect on other metal stocks .
Overall, the BSE metal index closed 5.67% down on Monday. Nalco, a public-sector aluminium producer, closed 8.65% lower at Rs 221.65, while SAIL, a public-sector steel-maker, closed 5.33%, or Rs107.5, down.
Hindalco, a $2.6 billion producer of aluminium and copper, announced on Sunday that it would pay $44.93 a share, a premium of nearly 17% , to acquire Novelis, which made a loss of $170 million in the first nine months of 2006.
“Hindalco’s profits are expected to rebound only in 2010, which is too far away. Investors look for quarter-on-quarter or year-on-year returns,” said Hitesh Kuvelkar, associate director of research at First Global Securities. “Maybe investors will sell now and look to buy later,” he added.
Other analysts expressed concerns that Hindalco had overpaid for Novelis. It’s debt to equity ratio could increase from 1:2 to 2:1, they pointed out, dragging down its profitability.
“One significant aspect is that Hindalco will make a capital expenditure of $6billion on Novelis and, at the same time, its Rs15,000 crore domestic capital expenditure plan remains unchanged,” said Manish Joshi, a metals analyst at Karvy Securities, a brokerage. “All of this will mean huge expense for the company.”
Analysts expected it to fall further to stabilize between Rs125 and Rs140. They said the Novelis and Corus acquisitions (the latter by Tata Steel) had been made at a time when global commodity prices were softening from historic highs.
Kotak Securities’ Ketan Karani, an analyst covering the company, said that the market was taking a short-term view of the Novelis acquisition. “They may have overpaid, but this is the cost of investing in a company with global ambitions. Over the longer term, this will help the company,” he added.
Karvy’s Joshi was not convinced. “There are no benefits of this acquisition for now,” he said. “There may be some five years from now, but we don’t know what things will be like then.”