Home >Markets >Mark To Market >Hindalco may not be squeezed much as Novelis’s  can  biz  holds  up
The high-margin auto division could still drag down overall volumes by 10% in the US.
The high-margin auto division could still drag down overall volumes by 10% in the US.

Hindalco may not be squeezed much as Novelis’s  can  biz  holds  up

  • Novelis’s share to parent Hindalco’s profitability is significant, making up 70% of consolidated Ebitda of latter
  • Analysts have currently pegged the enterprise value-to-Ebitda at about four times for FY22, a shade lower than its past averages

The near-standstill in economic activity and the shuttering of many manufacturing units has not put the brakes on beverage consumption in the US. Novelis Inc.’s beverage can production seems to be immune to the pandemic and may shore up parent Hindalco Industries’ (consolidated) operations. After a 40% fall year to date, the Hindalco scrip has recovered 17% in the past week.

Novelis’s contribution to its parent’s profitability is significant, accounting for about 70% of Hindalco’s consolidated Ebitda (earnings before interest, tax, depreciation and amortization). Hence, a disruption in its US business would have naturally hit Hindalco’s operating leverage quite hard.

However, beverage cans constitute 63% of Novelis’s volumes, which is expected to provide support. And demand for aluminium cans is rising due to an increase in in-house consumption. Outdoor consumption, though, has been crushed. Elsewhere, demand for beverage cans, particularly in Europe and Asia remains muted.

“Covid-19 has had a huge impact only on Novelis’ auto segment (20% of its FY20 volume mix), whereas the beverage-can division has largely been unaffected," said analysts at Kotak Institutional Equities in a note to clients.

Canning growth.
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Canning growth.

Nevertheless, lack of growth in its other divisions, such as auto and speciality metals, would crimp overall operating profit. The high-margin auto division could still drag down overall volumes by 10% in the US. Covid-19 lockdowns have brought auto lines in the US to a screeching halt. And the aerospace industry is going through a tumultuous patch, putting serious strain on Novelis’s speciality metals division.

But debt servicing remains manageable despite the conditions. “Novelis remains isolated from the pandemic due to strong growth from the can business, and interest coverage remains healthy. The company is sitting on high liquidity with negligible repayments in FY21-22E," said Siddharth Gadekar, analyst (institutional equities) at Equirus Securities Pvt. Ltd.

Analysts have currently pegged the enterprise value-to-Ebitda at about four times for FY22, a shade lower than its past averages.

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