Novelis rolls out a surprise for Hindalco shareholders
Novelis Inc.’s results brought some cheer to shareholders of parent Hindalco Industries Ltd. The Canadian unit of Hindalco said it will get $315 million (around Rs2,030 crore today) in return for giving up a 50% stake in an aluminium rolling unit in South Korea. That will be useful in lowering Novelis’s net debt, which as of 31 March was $4.3 billion compared to $4.4 billion a year ago.
Novelis also reported a 5% increase in its adjusted Ebitda (earnings before interest, tax, depreciation and amortization) in the March quarter over a year ago, on the back of a 9% increase in sales, although volumes were flat. On a sequential basis, the company’s adjusted Ebitda has risen by 16%. It benefited from a better sales mix of flat rolled aluminium products, as shipments to the automobile industry grew by 26% even as the beverage can segment underperformed. For the full year, it said operating cost efficiencies and a better mix contributed to better profits. Free cash flow generation also improved, up at $361 million compared to $160 million a year ago.
In its outlook, Novelis has cited excess capacity and customer consolidation as threats in the beverage can segment. It expects the mix to remain favourable, with cost controls and higher shipments to the automobile industry driving profitability. The stake sale in its Ulsan facility in South Korea will bring in cash, but the intention is also to drive up utilization with the help of the joint venture partner Kobe Steel.
The cash flow and bright spots in Novelis’s results saw Hindalco’s share rise by 3.4% on Thursday. Edelweiss Research has upgraded its expected fiscal year 2018 (FY18) earnings per share for Hindalco by 3% based on these results and expected improvement in profitability.
The next trigger for Hindalco will be the stand-alone results, reflecting its Indian operations. There, the aluminium business should benefit from better realizations but the copper business can see some impact from bearish trends in treatment and refining charges. Still, those factors were known and reflected in its valuations but the Novelis results have given investors reasons to be slightly more optimistic about FY18. Any surprises in its stand-alone results are a risk to watch out for.