Hindalco on Wednesday morning announced the postponement of Novelis IPO in the US citing ‘market conditions’. The company (Novelis) also mentioned that it will continue to evaluate the timing of the offer.
This comes barely a month after announcing the IPO plans and even setting an IPO price band of $18-21 per share. This valued it at 8.72 times trailing EV/EBITDA at the higher end, including possible oversubscription.
A 100 per cent subsidiary of Hindalco, Novelis is the world’s largest aluminium producer based in the US. Hindalco acquired the company for $6 billion in 2007. The backward integrated producer uses 63 per cent recycled content to supply to beverage cans (47 per cent in FY24), automobiles (24 per cent) and speciality segments (25 per cent)
Implications
After a gap-down opening, Hindalco shares recovered to close with a 6.5 per cent gain on Wednesday. This positive closing was not to do with IPO delay news, but more to do with the strong bounce back in overall market after Tuesday’s rout. The stock is flat in the week after correcting 7 per cent on Tuesday, owing to elections outcome.
The news is not positive for the stock even as the exact ‘market conditions’ for the delay are not known.
One can speculate that if the investor reaction in the US for the road show was not encouraging, the valuation premium was on the higher side or if broad macro-economic recovery needed for Aluminum demand were not favourable.
In the US, capital markets are near their lifetime highs (Dow Jones and S&P 500), implying market condition are good.
The demand for Aluminium in the US, which is a net importer, is expected to bounce back as destocking by bottling companies is expected to wind up in the short-term.
China, which accounts for bulk of production and exports, is currently facing a shortage as well.
On the interest rates front, the European Central Bank is expected to cut interest rates shortly.
With plenty of tailwinds for the underlying business, investors will have to wait for the clear reasons for the delay to be spelt out by the company. Meanwhile, the company in FY24 invested $1.2 billion of the ambitious $4.9 billion expansion plan, which centres around the $4.1 billion greenfield Aluminum plant in Bay Minette, USA.
We gave the recommendation considering the scope for volatility in view of the elections in India and the US, global trade wars and the lower price levels which would offer better margins of safety for new investors.
The call was based on sum of the parts valuation for Novelis, India Aluminum and India Copper, and value implied to new capacity coming on stream compared to their capex.
The value we had assigned for Novelis for this calculation was at the lower end of the IPO range, providing for some buffer.
Hindalco’s balance sheet is strong as well with consolidated net debt to EBITDA at 1.2 times and India business at net cash position of ₹3,500 crore in March-2024. The company has expansion plans in India apart from US expansion. In India, a new alumina facility, power linkages and downstream value-added portfolio are under consideration.
While IPO delay does not affect the valuation, it does require clarity on the future plan and exact nature of ‘market conditions’.
Hence we now recommend investors wait for clarity before proceeding on the stock