The Hindu Business Line : Hindalco declines on Novelis losses

Kolkata, Feb. 19 Hindalco Industries has been sliding after it approved a financial restructuring exercise aimed at amortisation of goodwill incurred for the Novelis acquisition and growth projects in India via using reserves from its securities premium account.

The Novelis results for the third quarter to December 31, 2008 was worse than expected according to brokerages, which have begun giving sell recommendation for Hindalco. According to ICICI Securities, the $1.5-billion write-down (because of goodwill and other asset impairment under US GAAP) is one-time extraordinary item with no-cash flow impact. The brokerage also felt that it would not affect leverage ratios.

Value erosion

But there are others, who feel that the exercise would severely affect the net worth, debt-equity ratio and leveraging power of both Novelis and Hindalco. “Whatever the accounting treatment, it would adversely impact the net worth, book value, and the debt-equity ratio of the two companies. It would also bring down the market valuation,” said a CEO of a foreign equity asset management company. He said the exercise will have the effect of saying that asset valuation of Novelis has come down to almost one fourth of what had been paid by Hindalco earlier.

Mr Amitabh Chakraborty, President, Equity of Religare, also felt the same way. “The exercise will bring the asset value close to market value,” said Mr Arun Kejriwal.

According to Credit Suisse: “What worries us though is the consistency of non-performing losses (of Novelis). The count over 10 quarters (excluding goodwill write off) is $640 million. Novelis EBITDA was $870 million over the same period.”

Mark-to-market losses

It also said: “Given the sharp fall in EBITDA and equity (goodwill impairment), a breach of debt covenants by Novelis may not be surprising in the two-three quarters. Hindalco may have to resort to asset sales.”

Credit Suisse said that as Novelis “cut production by 15 per cent (mostly at high-cost locations), sales volumes may not recover soon.” It reduced shipment estimates to 10 per cent Y-o-Y in FY 2010.

Analysts are also apprehensive that the $472 million mark-to-market losses on derivatives may be actually realised as chances of LME prices recovering in the current quarter are grim.

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