Novelis’ $1.8-bn Q3 loss to have limited impact on Hindalco
Novelis has reported a net loss of $1.8 bn in the third quarter ended December 31, 2008 owing largely to a goodwill loss of $1.5 bn, a fallout of the ongoing global meltdown.
By ET Bureau |
MUMBAI: Underscoring Hindalco���s recent move to create a special account to write down non-operating losses, Novelis, a subsidiary, has reported a net loss of $1.8 bn in the third quarter ended December 31, 2008 owing largely to a goodwill loss of $1.5 bn, a fallout of the ongoing global meltdown.
The impact of the loss posted by Novelis on Hindalco Industries would be felt at the end of the current fiscal when Hindalco consolidates its earnings. The impact should, however, be limited as Hindalco has initiated steps to offset the $1.5-billion loss of the total $1.8-billion loss incurred by Novelis. The remaining $300-million loss would impact Hindalco���s profitability.
Hindalco would be among the first local companies to report the erosion in goodwill mainly because Novelis has declared its earnings early; efforts to offset loss in goodwill valuations are likely to be witnessed at other Indian companies that made large-ticket overseas acquisitions in the past two to three years, too.
Since the $1.5-billion goodwill loss would be offset by the securities premium account, it would shrink Hindalco���s balance sheet size to that extent. Hindalco CFO Sunirmal Talukdar said: ���It would also not have any impact on Hindalco���s fund-raising ability as goodwill impairment is excluded from such agreements.���
Shares of Hindalco slipped by 1.5% to close at Rs 41.55 on the BSE on Wednesday, ending the sharp fall witnessed over the past 10 days when more than 6% of the stock���s market cap was shaved off. On February 16, Hindalco, the Aditya Birla Group flagship, said it���s board had approved the formation of a business reconstruction reserve account that would use up to Rs 8,650 crore from the securities premium account for offsetting ���of non operating/extraordinary costs on international acquisitions made by Hindalco and organic growth projects in India.���
This money would be used to write down the $1.5-billion non-cash asset impairment charge, which includes a $1.3-billion fall in the value of goodwill and a $160-million writedown of Novelis��� investment in a German unit.
���This year, such a trigger came when Novelis��� publicly traded bonds fell sharply due to the downtrend in the metal industry and shipments of aluminium products also dipped,��� said Mr Talukdar, adding that the impairment test was hence conducted for the third quarter.
About 80% of the fall in goodwill value was attributed to the increased market cost of capital, or the weighted average cost of debt, said Mr Talukdar. The test revealed that the market cost of debt ���is significantly higher than the interest rates on Novelis��� existing debt...a notional concept that also considers, for instance, how much somebody would need to borrow if they were to acquire Novelis today.���
The impact of the loss posted by Novelis on Hindalco Industries would be felt at the end of the current fiscal when Hindalco consolidates its earnings. The impact should, however, be limited as Hindalco has initiated steps to offset the $1.5-billion loss of the total $1.8-billion loss incurred by Novelis. The remaining $300-million loss would impact Hindalco���s profitability.
Hindalco would be among the first local companies to report the erosion in goodwill mainly because Novelis has declared its earnings early; efforts to offset loss in goodwill valuations are likely to be witnessed at other Indian companies that made large-ticket overseas acquisitions in the past two to three years, too.
Since the $1.5-billion goodwill loss would be offset by the securities premium account, it would shrink Hindalco���s balance sheet size to that extent. Hindalco CFO Sunirmal Talukdar said: ���It would also not have any impact on Hindalco���s fund-raising ability as goodwill impairment is excluded from such agreements.���
Shares of Hindalco slipped by 1.5% to close at Rs 41.55 on the BSE on Wednesday, ending the sharp fall witnessed over the past 10 days when more than 6% of the stock���s market cap was shaved off. On February 16, Hindalco, the Aditya Birla Group flagship, said it���s board had approved the formation of a business reconstruction reserve account that would use up to Rs 8,650 crore from the securities premium account for offsetting ���of non operating/extraordinary costs on international acquisitions made by Hindalco and organic growth projects in India.���
This money would be used to write down the $1.5-billion non-cash asset impairment charge, which includes a $1.3-billion fall in the value of goodwill and a $160-million writedown of Novelis��� investment in a German unit.
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Under both US GAAP and under the IFRS ��� all Indian companies have to adopt IFRS by 2011 ��� companies must conduct an impairment test once every fiscal in the fourth quarter. ���This year, such a trigger came when Novelis��� publicly traded bonds fell sharply due to the downtrend in the metal industry and shipments of aluminium products also dipped,��� said Mr Talukdar, adding that the impairment test was hence conducted for the third quarter.
About 80% of the fall in goodwill value was attributed to the increased market cost of capital, or the weighted average cost of debt, said Mr Talukdar. The test revealed that the market cost of debt ���is significantly higher than the interest rates on Novelis��� existing debt...a notional concept that also considers, for instance, how much somebody would need to borrow if they were to acquire Novelis today.���
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