Hindalco Industries Ltd’s overseas subsidiary Novelis Inc. is doing its bit to fund its parent’s expansion plans, along with restructuring its own debt burden.

Under Novelis Inc.’s existing debt repayment schedule, it would have had to repay about $2.4 billion (Rs10,800 crore) in fiscal 2015.

Though it has adequate liquidity and rising free cash flows, the company has chosen to recapitalize its balance sheet. That will serve a dual purpose: get more time to repay lenders, and help its parent raise some cash for its funding plans.

Novelis will raise about $4 billion as debt, and has recently finished the pricing of a $2.5 billion long-term debt programme. Its payment maturity will extend beyond 2015, with about $1.1 billion of the new debt repayable in 2017 and the rest in 2020. Later, it plans to raise another $1.5 billion via a secured term loan credit facility.

Novelis has its own capital expenditure programme lined up, as it finds demand for rolled aluminium products rising faster than its existing capacity can cater to.

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It had spent about $100 million in fiscal 2010 and intends to spend about $250 million in fiscal 2011, of which $110 million is for expanding its Brazilian facility and tweaking its plants to process more metal. In the next four years, it expects capacity to rise by 20% on the back to these efforts, with minimal capital expenditure.

Rising demand for its products, and limited capacities (even among competitors), allowed Novelis’ sales to spurt on rising volumes; its margins shot up due to higher processing charges. In the September quarter, its sales rose by 16%, while earnings before interest, depreciation, tax and amortization (Ebitda), adjusted for items such as losses/gains on derivatives and restructuring charges, rose by 45%.

In the foreseeable future, Novelis’ run of good performance should continue, giving it the confidence to raise and service debt. Hindalco has several expansion and new projects lined up in the aluminium space, for which it needs capital. In its standalone balance sheet, Hindalco’s debt as of March 2010 fell to Rs6,356 crore from Rs8,324 crore in the previous year, but has risen to Rs7,489 crore as of September 30, reflecting ongoing capital investments. Of its total projects worth $8.7 billion, about $5 billion worth of projects are in the advanced stages and require funding. It has spent $1.6 billion, as of September, on these projects and was planning to raise debt for the rest.

Novelis will infuse $1.7 billion into Hindalco’s balance sheet, structured as a return of capital. That will take care of a big chunk of its funding requirements, leaving it with a smaller portion to raise. In the consolidated accounts, the amount will still reflect as debt. But Hindalco’s idea of using Novelis to raise funds leaves its standalone balance sheet lean, giving it the leeway to raise debt at a future date, with a debt to equity ratio of just 0.3 times.