Hindalco Novelis Merger Final

7/31/2019 Hindalco Novelis Merger Final

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By

Abhishek Sinha

Anandi Sriram

Jathin Jayaram

Karthikeyan R


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INDUSTRY OVERVIEW: GLOBAL

Aluminum represents the second largest metals market in theworld.

Newer packaging applications and increased usage inautomobiles is expected to keep the demand growth foraluminium over 5% in the long-term.

Asia will continue to be the high consumption growth area ledby China, expected aluminium consumption - double-digitgrowth rates in in the medium-term.

Power, infrastructure and transportation account for almost3/4th of domestic aluminium consumption.

With key consuming industries forming part of the domesticcore sector, the aluminium industry is sensitive to fluctuationsin performance of the economy.


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INDUSTRY OVERVIEW: INDIA

Large integrated players like Hindalco and National AluminiumCompany (Nalco).

The other producers of primary aluminium include IndianAluminium (Indal), now merged with Hindalco, Bharat

Aluminium (Balco) and Madras Aluminium (Malco). The per capita consumption of aluminium

India - 0.5 Kg (USA 25 Kg, Japan-19kg, Europe - 10 kg,World 5Kg)

The demand of aluminium is expected to grow by about 9

percent per annum from present consumption levels. India is a net exporter of alumina and aluminium metal at

present. The customs duty (import) has been reduced in a series of

steps from 15% in 2003 to 5% in January 2007.


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HINDALCO


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COMPANY OVERVIEW

Commenced its operations in 1962

Flagship company of the Aditya Birla Group.

2 strategic businesses: Aluminium and copper.

Annual revenue - US $14 billion.

Market capitalization in excess of US $ 23 billion.

country's largest integrated aluminium producer andranks among the top quartile of low cost producers inthe world.


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ALUMINIUM DIVISION

The aluminium division's product range includesalumina chemicals, primary aluminium ingots,billets, wire rods, rolled products, extrusions, foilsand alloy wheels.

It enjoys a domestic market share of

42 per cent in primary aluminium,

63 per cent in rolled products,

20 per cent in extrusions,

44 per cent in foils and

31 per cent in wheels.


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COPPER PLANT

The copper plant produces

copper cathodes, continuous cast copper rodsand precious metals like gold, silver andplatinum group metal mix.

sulphuric acid, phosphoric acid, di-ammoniumphosphate, other phosphatic fertilisers andphospho-gypsum.


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Hindalco Industries Limited has a 51.0% shareholding in

Aditya Birla Minerals which has mining and explorationactivities focused in Australia.

The company has 2 R&D centres at Belgaum, Karnataka

and Taloja, Maharashtra.

Year over year, Hindalco Industries Ltd. has been able togrow revenues from 121.2B to 193.2B.

Most impressively, the company has been able to reducethe percentage of sales devoted SG&A cost from 4.15%to 2.96%.

Hence bottom line growth increased from 15.8B to 26.9B.


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NOVELIS


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COMPANY OVERVIEW - NOVELIS

World leader in aluminium rolling, producing an estimated19 percent of the world's flat-rolled aluminium products.

World leader in the recycling of used aluminium beveragecans.

No. 1 rolled products producer in Europe, South Americaand Asia, and the No. 2 producer in North America.

The company produces the highest-quality aluminiumsheet and foil products for customers in high -value

markets including automotive, transportation, packaging ,construction and printing


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COMPANY OVERVIEW - NOVELIS

Its customers include Coca Cola, Datching Holdings,Ford, General Motors, Ryerson Tull, Tetra Pak,ThyssenKrupp.

A diversified product portfolio and strong geographical

presence It was created in 2005 as a result of spin off a Canada

based Aluminium Company called Alcan and its hostiletakeover of a French Aluminium company called

Pechiney. Suffered Huge Debt as a result of the spin off, the debt

close to $ 2.33 billion and suffered losses due tomiscalculation of aluminium prices


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FACTS ABOUTTHE DEAL

The acquisition of Novelis by Hindalco was in an all-cashtransaction, which values Novelis at enterprise value ofapproximately US $6.0 billion, including approximately US$2.4 billion of debt.

After merger Hindalco will emerge as the biggest rolled

aluminium products maker and fifth -largest integratedaluminium manufacturer in the world.

The Novelis acquisition will give the company immediate scale

and strong a global footprint

Novelis will work as a forward integration for Hindalco as thecompany is expected to ship primary aluminium to Novelis fordownstream value addition


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MORE FACTS

Hindalco expected that its greenfield expansion will giveit primary aluminium capacity of approximately 1 milliontonne, but may take 3-4 years to all the capacities tocome into operation. It also expected that aluminiumprices to soften up which would help profitability ofNovelis.

The debt component of Novelis stood at US $2.4 billionand additional US $2.8 billion will be taken by Hindalco tofinance the deal.

CRISIL had placed its outstanding long-term rating ofAAA/Stable on Hindalco Industries Limited (Hindalco),on Rating Watch with Negative Implications andshort term debt had been given a rating of P1+


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FUNDING STRUCTURE.. Novelis Equity was worth $3.6 Billion

Novelis shareholders received US $44.93 in cash for eachoutstanding common share roughly 15 per cent premium tothe market price

AV Metals the A V Birla group's Canada-based special

purpose vehicle (SPV) - infused US$ 3.5 billion to financeHindalcos acquisition.

AV Metals took loans worth US$ 2.8 billion from three financialinstitutions, namely UBS, ABN Amro and Bank of America.

This includes a bridge loan of US$ 1.4 billion at a coupon rateof 7.2 percent.

Essel Mining & Industries, a closely held company of thegroup, brought in US$ 300 million while Hindalco will mobilizeUS$ 450 million from its treasury operations.


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VALUATION


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VALUATION

Noveliss valuation was a big concern.

Analysts believed the Birlas were paying too high a price for a company that incurreda loss of US $170 million for the nine months ended 30 September 2006. In its latestguidance, the Novelis management has indicated a loss of US $240 million-285 millionfor the whole of 2006. A key factor behind this was price ceilings contracted to Novelislong-term can-making customers, which impacted revenues by US $350m.

Even in 2005, when Novelis had made a US $90-million net profit, its share pricesnever crossed US $30.

Financial numbers show that Novelis is not a good choice by Hindalco at least at theprice that they paid for the company. The imediate effect of the merger is thatHindalco would achieve its target of doubling its turnover to $ 20 billion three years inadvance. Novelis fits well in the long term strategy of Hindalco.

So, why is Hindalco paying US $44.93 a share for a loss-making company?


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Hindalco has long held an ambition to become a leading (top 10)player across its 2 key business segments, aluminium and copper.The acquisition of Novelis should achieve part of this goal bypropelling Hindalco to the worlds leading producer of aluminium flatrolled products.

Based on Novelis guidance and consensus forecasts for 2007, itwas estimated that Hindalco was paying 11.4x EBITDA, 20.7x EBITor 53.4x PE.

At a total enterprise value of US $ 6 billion, Novelis was nearly 50%larger than Hindalcos current market capitalization. The concern wasthe severity of the earnings and value dilution that will result.


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At Novelis,long term annual free cash flow target of US $400m (usinga real WACC of 9%), we estimate the acquisition will destroy valueby INR60/share. To put it another way, we estimate Hindalco willneed to improve annual free cash flow by 35% to US $540m for theacquisition to be value (NPV) neutral. Perhaps the greatest issue

with the Novelis acquisition is Hindalcos balance sheet position postacquisition.

Having already committed to significant expansion projects, Noveliswill push Hindalcos high gearing levels even further. We calculatethat Hindalcos gearing (ND/E) will reach 236%, with its Net Debt /EBITDA ratio reaching over 5.0x.

Based on Novelis guidance for 2007 and assuming this is relevant toHindalcos FY08 period, we calculate Hindalcos EPS will be dilutedby 18%.


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FINANCIALSOF NOVELIS


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CONTD


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The formula of FCFF is given by:FCFF = EBIT(1 - tax rate) - CapEx + Depreciation - Change in non-

cash working capital


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EFFECTOF NEWSONTHE STOCK PRICES


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REASONSFOR ACQUISITION


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RATIONALE

According to Standard and Poors it would take 10years and $ 12 billion to build the 29 plants thatNovelis has with capacity of close to 3 million

tonnes.

As per company details, the replacement value ofthe Novelis is US $12 billion.


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SWOT


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STRENGTH

Global footprint

Cutting edge technology

Synergy Going up in the value chain.

Highly competent team.


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WEAKNESS

Moving from high margin business producer to lowmargin one

Debt and Losses being carrying forward.

Cultural differences


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OPPORTUNITY

Increased use of aluminium in automobile to furtherbolster domestic demand.

Growth in per capita consumption of aluminium.

Increased domestic demand due to privatization of

electricity and T&D


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THREAT

Fluctuation in the prices of commodities exchangerates.

Exchange rate movements particularly betweenINR and US $ weakening Hindalcos cost andrevenue.


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CURRENT SCENARIO


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SHARE PRICE MOVEMENT


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THANKYOU!!!!!!!

Hindalco Novelis Merger Final

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