Hindalco Industries Ltd stock was the top gainer among the Nifty 50 companies on Wednesday, hitting a new 52-week high of ₹713.50 before closing about 4% up on the day. Details of the proposed initial public offering (IPO) of its subsidiary Novelis in the US, which assigns it a market capitalisation of $12.6 billion ( ₹1.04 trillion) at the upper end of the $18-21 per share band, have brought cheer. This is almost two-thirds of Hindalco’s market cap of about ₹1.52 trillion before the announcement.
The valuation ascribed to Novelis is in line with or higher than analysts’ estimates. “At the higher end of the IPO price and with $4.8 billion of debt, Novelis’s enterprise value works out to $17.4 billion, which is 9% higher than [the $16-billion valuation from] our sum-of-the-parts valuation for Hindalco,” said a note by Prabhudas Lilladher. At the lower end of the price band, the EV works out to $15.6 billion, it added. The EV of a company is its market capitalisation plus its net debt.
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Ambit Capital ascribed Novelis an EV of $13.7 billion in its sum-of-the-parts valuation. “This provides comfort that Novelis expects a valuation provided to more specialised players,” said Satyadeep Jain, a research analyst at the firm.
Novelis contributed 62% of Hindalco’s consolidated revenue and 56% of its Ebitda in FY24. Considering the buoyancy in US equity markets, Prabhudas Lilladher expects Novelis to receive a valuation at the higher end of the price band. With inflation in the US largely moving as expected, a rate cut by the US Federal Reserve could further improve sentiment among equity investors.
No clarity on IPO proceeds
Hindalco has not yet disclosed what it will do with the proceeds of the IPO. In the March-quarter (Q4 FY24) earnings call last week, management refrained from answering specific questions about the Novelis IPO.
At the current exchange rate, Hindalco would receive about ₹7,870 crore at the upper end of the price band. On the face of it, this means the net-debt-to-Ebitda ratio would drop to 1x from 1.3x as of March-end, when Hindalco’s consolidated net debt stood at ₹31,536 crore and Novelis’s at ₹35,937 crore.
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“But we will still need clarity on how Hindalco plans to deploy these proceeds,” said Jain. “Whether US investors provide Novelis this valuation remains to be seen. The size of the offering (7.5%) is also relatively small, so price discovery and global listing do appear to be the primary motives.”
Hindalco is betting big on Novelis
The Street is gung-ho about the company’s prospects. Hindalco has planned investments in Novelis totaling more than ₹40,000 crore ($4.9 billion), including about ₹15,000 crore in FY25. Projects include expanding aluminium-processing capacity by about 50% and expanding recycling capacity. Continued growth in major segments such as beverage cans and automotive (led by EVs), and the increased adoption of aluminium in new segments such as aerospace provide sufficient visibility. A facility for automotive recycling is expected to be commissioned during FY25, which will increase its use of recycled materials and thus improve margins.
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To be sure, the volatile nature of aluminium prices is a key risk that could reduce the amount of cash available for capex. And notwithstanding its impressive performance, stress in European economies is a concern for Novelis. Having undertaken several projects, it runs the risk of cost or time overruns. For now, the sharp increase in its stock price (up 68% in the past year) suggests investors are capturing the optimism adequately.
