Aleris deal helps Hindalco stock form a bottom
Data Source: London Metals Exchange (LME)
One way to assess any acquisition deal is to look at the stock price. Aleris deal has surely helped Hindalco stock to make a bottom and rally 50% in a span of just 20 days. For one of India’s largest manufacturers of aluminium and copper, the Aleris deal comes at the appropriate time. Global industrial metal prices have already taken deep cuts on the back of weak Chinese demand and Aleris is more of a downstream player. This is also continuation of the Group’s reiteration of its inorganic approach to growing the aluminium business.
Aleris acquisition is about a splash in value-added aluminium
De-risking the aluminium business model
One of the big challenges Hindalco faced in the last few years (like most metals companies) is the vulnerability to vagaries of LME prices. The Aleris deal will substantially insulate Hindalco from the global price fluctuations due to the focus on the aerospace and transport industry. Kumaramangalam Birla has constantly spoken about moving more of its business downstream so as to reduce the dependence on the pure commodity franchise. Aleris brings over 13 plants across Europe and the US into the Hindalco portfolio!
How will the deal impact the financials of Hindalco?
The $2.58 billion deal will entail $1.80 billion of debt takeover and $780 million payments in cash. With Novelis sitting on cash pile of close to $1.8 billion, servicing the bank borrowings should not be much of an issue. In terms of financial risk, the impact will be short term. For FY20, the Net debt to EBITDA ratio is expected to increase from 2.4X to 3.2X. However, the Net Debt / EBITDA ratio is expected to taper back to 2.6X by FY21. To that extent, the financial risk created by funding the acquisition is expected to be limited and time-bound.
In his post-deal press conference, Mr. Birla had spoken at length about the importance of taking audacious and calculated risks in challenging times. For Hindalco, the next few quarters could be the real test of its big downstream bet!