Novelis cash flow to reduce parent Hindalco debt

MUMBAI: Hindalco’s US subsidiary Novelis will play a significant role in reducing the parent’s massive debt going forward as it trims its capital expenditure and generates cash on back of better sales volume.

Novelis, the world’s biggest maker of flat-rolled aluminum used to make beverage cans, decided to pay a dividend of $250 million (Rs. 1,470 crore) to the parent company this year. This is a huge contribution from Novelis, considering it generated $254 million in cash between fiscal 2008 and 2014 cumulatively and its debt being under review for a possible default by Moody’s.

Novelis has been negatively impacted due to scarcity of scrap aluminium and rising premiums on the metal. But most analysts are not worried about Novelis’ debt and expect business to get better for the company, as it shifts focus to higher-margin automotive market from the subdued can market in Asia and America.

“The use of recycled metal and higher automotive sales share and volumes from fiscal 2015 are likely to boost the adjusted earnings before interest, tax, depreciation and amortisation (EBITDA), offsetting any adverse price pressure impact in Asia,” said analyst Jimesh Sanghvi of IL&FS Broking services. The company expects volume growth to be 10% in the current fiscal.
Hindalco had a total debt of Rs. 25,682.93 crore as on September-end 2013 on a standalone basis. It has skyrocketed due to investment in capacity-building in India. Novelis, which was acquired for $6 billion in 2007, paid a dividend of $1.7 billion in 2010. “Novelis has now passed the inflection point with the path set for growth as benefits of the $2-billion capex have started to kick in,” wrote Motilal Oswal analyst Sanjay Jain. “Novelis has turned into a cash cow,” he added.

The management of Novelis expects the share of auto segment in product mix to increase from 9% last year to 20% in fiscal 2017. Analysts expect dividend payment to Hindalco to become an annual exercise considering the liquidity position of the company.

“There is an expectation is that the volume impact of the company’s investment will be visible going forward and cash generation at the company will get better,” said Goutam Chakraborty, an analyst with Emkay Global. Novelis, which gets a majority of its revenue from the can market, undertook an aggressive expansion plan and spent on growing global rolling, finishing and recycling facilities.

Capital expenditure will be on a downward trend starting this year, helping it preserve more cash. It is also going to sell non-core assets this year, possibly giving $110 million in cash.

However, some analysts in the market are still worried about subdued can market, which has been struggling with overcapacity and decline in sale of fizzy drinks that are usually packaged in cans.

"Even though the Street is gung-ho about the increasing automotive mix in the portfolio, we think higher automotive volumes can't offset the weakness in other segments," wrote Espirito Santo analysts Ritesh Shah and Anshuman Atri in a report. They are also worried poor cash flow conversion at Novelis due to one of expenses.

Hindalco will report fourth-quarter results next week on Thursday.