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Thursday, February 15, 2007

WOW - CLSA - Hindalco


Hindalco: Novelis deal roll out Hindalco?says CLSA
Hindalco
Broking House - CLSA Emerging Markets
Recommendation - Underperformer
No meaningful synergy in near term to Hindalco...
In its Report Dated 13th February 2007, CLSA initiates ''Underperform'' on Hindalco at CMP Rs 149.40 with a Target of Rs 140 for 12 month.

CLSA mentions that Hindalco has entered into a definitive agreement with the Canada based Novelis to buy out the company for US$3.6bn in equity in an all cash deal. With this acquisition Hindalco is effectively making an investment worth 80% of its market cap in an asset that is likely to yield negative/low returns in near to medium term. CLSA further adds that Novelis also has US$2.4bn of debt on books, implying EV of US$6bn.

CLSA makes us aware that the deal will require the approval of 66.66% of the votes cast by shareholders of Novelis Inc. at a special meeting to be called to consider the arrangement followed by court approval.

CLSA states that acquisition price for Novelis is at 100% premium to Novelis'' 2006 average price and at 57% premium to last three month average price. As per news paper reports Hindalco will buy Novelis through a SPV. Hindalco will invest US$750mn of equity in that SPV (US$450mn own money and US$300mn borrowed from Essel Mining) says CLSA.

CLSA highlights the SPV will take debt of US$2.8bn. Unlike Tata-Corus deal, lenders for all of this debt will have recourse to Hindalco.

CLSA informs us that since Novelis has made a loss in 9m2006 and is unlikely to have significant surplus cash flows in the coming years, it would be difficult to raise non-recourse debt for Hindalco in the SPV.

CLSA do not see any meaningful synergy gains in near to medium term and acquisition is likely to result in over 15% EPS decline for FY08. Hindalco''s net gearing will go up from 0.1x to 1.1x. Until there is more visibility to returns from this transaction, CLSA believes the stock will underperform and have cut on its recommendation to reflect this view. CLSA quotes new target price of Rs140.

Thanks HK