Heavy volumes accompany post Novelis acquisition setback in Hindalco

Worries that Hindalco will not reap the benefits of the $5.9 billion deal to buy Novelis Inc for some time, knocked down its shares nearly 14% today to Rs 149.05.

The stock declined on a heavy volume of 72.8 lakh shares on BSE, much higher than the average daily volume of 15.4 lakh shares in the past one year.

Hindalco's scrip was relatively firm over the past few weeks despite weak global copper prices. The stock moved between Rs 173 and Rs 183 since late-January 2007.

Hindalco said on Sunday, the deal will make it the world's largest aluminium rolling company, doubling its turnover to $20 billion, but it will boost earnings only by 2010. Hindalco will pay $3.5 billion in cash and take on debt of $2.4 billion under the agreement. Novelis is the largest flat rolled products player in the world, with a 19% share of the global market.

Novelis has entered into certain `can body’ (material for beverage cans) contracts that do not allow it to pass on commodity price rises to such customers. These contracts expire in January 2010, which in turn will impact the profitability of Hindalco’s consolidated financial performance. Novelis posted a net loss of $102 million during the third quarter of 2006.

Hindalco said it will fund the Novelis acquisition through a recourse debt of $2.8 billion. Hindalco’s treasury will contribute $450 million, while SL Iron Ore Mining, another group company, will contribute $300 million as debt.

Market men were also concerned about the impact of the debt on Hindalco's balance sheet, although the company said on Sunday it would maintain its debt-equity ratio at a "comfortable" level.

Hindalco’s net profit jumped 92% in the December 2006 quarter to Rs 643.90 crore, on 62% growth in net sales to Rs 4656.20 crore.