Hindalco takes its crown jewel to the public

In a surprise announcement on Tuesday, Novelis said it has submitted a confidential filing for an initial public offering (IPO) with the US Securities and Exchange Commission (SEC). The IPO will be a secondary sale of shares by Hindalco, meaning Novelis will not receive any capital as part of the offer. Hindalco holds 100% of Novelis.

Under a confidential IPO filing, the applicant submits information to the regulator alone, which is kept under wraps until the application is approved. Novelis did not disclose the size of the offer or the valuation it will seek.

Analysts tracking Hindalco pointed out that it is a reasonably good time to go public in the US, with the Federal Reserve indicating an end to interest rate hikes.

“The IPO of Novelis will have a positive impact on Hindalco, its parent company. By listing its subsidiary, Hindalco can benefit from the value created by its investment. The monetization by way of an offer for the sale of a part stake will have an immediate impact on Hindalco’s stock price and, over time, post-Novelis listing, the share price of its US subsidiary will depend on how it will perform in its business going forward,” said Dhiraj Sachdev, chief investment officer of Roha Asset Managers.

It is not immediately clear what Hindalco plans to do with the IPO proceeds and whether it will choose to give out some of it as dividends. Hindalco has issued dividends regularly since 2007, with the latest dividend yield at 1.4%.

“We’ll get a better sense once the numbers are out, but I would not be happy if the company seeks enterprise value lower than seven times Ebitda,” an analyst tracking the company said on condition of anonymity. That translates to a valuation of roughly $17 billion. Ebitda is short for earnings before interest, tax, depreciation and amortization.

Hindalco bagged Novelis in 2007, at a time Indian corporate houses were in an acquisition frenzy in the West. At the time, group chairman Kumar Mangalam Birla had said that it was only reasonable for his company to pay a premium to acquire a world leader.

Today, the American company is significantly different from the maker of beverage cans and automotive parts it was 17 years ago. It is in the midst of building the first new aluminium mill in over 40 years in the US, in Alabama. It also owns Aleris, an Ohio-based rolled aluminium products maker that it acquired for $2.8 billion in 2020.

Novelis now accounts for XX% of Hindalco’s consolidated revenue and XX% of its profits. It is the largest producer of aluminium sheets for beverage cans in the world outside of China, and has a significant share of the aerospace and specialty products market, thanks to its acquisition of Aleris.

The performance of Novelis has an outsized bearing on Hindalco’s shares. The Hindalco stock plunged as much as 15% last Tuesday after Novelis announced a 65% hike in capital investment for the Alabama plant. The plant will now be completed at a cost of $4.1 billion, and delayed by a year.

The Hindalco stock is yet to fully recover since. It closed at ₹511.8 on the BSE on Tuesday, down 0.14%, while the benchmark Sensex index gained 0.48%. The Novelis IPO announcement came after market hours.

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Published: 20 Feb 2024, 11:20 PM IST