Buy Hindalco Industries, target Rs 244: Emkay Global Financial Services
The DoJ cited in its release that the proposed acquisition will reduce the number of auto body sheet producers from four to two.
By ETMarkets.com | Updated:
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Emkay Global has given a ‘buy’ recommendation on Hindalco Industries with a price target of Rs 244.
The US Department of Justice (DoJ) highlighted in its press release that the proposed acquisition will "eliminate a new and disruptive rival supplying aluminum sheets for next generation automobiles."
The DoJ cited in its release that the proposed acquisition will reduce the number of auto body sheet producers from four to two. With thae proposed acquisition, Novelis will lock down 60% of the existing domestic auto body sheet capacity and vast majority of the expansion in this segment.
The DoJ and Novelis have agreed to refer the matter to a binding arbitration, given the differences in calculating the market size, among other things. While Novelis takes a broader view of the auto body sheet market which includes steel auto body sheets as well, the DoJ has taken a narrow view of it, limiting the market only to aluminum auto body sheets.
“If this acquisition is blocked, we believe it would be negative for Hindalco given that aerospace and auto body sheets are the two biggest attractions of Aleris. With the premium valuations at which the deal (Novelis' acquisition of Aleris) has been agreed upon, we believe the retention of the auto body sheet business is essential for the deal to be value-accretive for Hindalco,” the brokerage said.
Novelis had agreed to acquire Aleris for a total EV of USD2.58bn (USD775mn in cash and balance being assumption of debt). Autos (22%) and Aerospace (4%) constitute a quarter of the total shipments for Aleris, which has a capacity of c.1mt. In Q2CY19, Aleris shipped 231.8kt of metal, in which the aerospace business grew 20% and the auto body sheet business grew 56%, driven largely by the US business. It reported EBITDA of USD108mn for the quarter, of which North America contributed USD76.5mn.
The US Department of Justice (DoJ) highlighted in its press release that the proposed acquisition will "eliminate a new and disruptive rival supplying aluminum sheets for next generation automobiles."
The DoJ cited in its release that the proposed acquisition will reduce the number of auto body sheet producers from four to two. With thae proposed acquisition, Novelis will lock down 60% of the existing domestic auto body sheet capacity and vast majority of the expansion in this segment.
The DoJ and Novelis have agreed to refer the matter to a binding arbitration, given the differences in calculating the market size, among other things. While Novelis takes a broader view of the auto body sheet market which includes steel auto body sheets as well, the DoJ has taken a narrow view of it, limiting the market only to aluminum auto body sheets.
“If this acquisition is blocked, we believe it would be negative for Hindalco given that aerospace and auto body sheets are the two biggest attractions of Aleris. With the premium valuations at which the deal (Novelis' acquisition of Aleris) has been agreed upon, we believe the retention of the auto body sheet business is essential for the deal to be value-accretive for Hindalco,” the brokerage said.
Novelis had agreed to acquire Aleris for a total EV of USD2.58bn (USD775mn in cash and balance being assumption of debt). Autos (22%) and Aerospace (4%) constitute a quarter of the total shipments for Aleris, which has a capacity of c.1mt. In Q2CY19, Aleris shipped 231.8kt of metal, in which the aerospace business grew 20% and the auto body sheet business grew 56%, driven largely by the US business. It reported EBITDA of USD108mn for the quarter, of which North America contributed USD76.5mn.
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