Novelis' IPO plans: What is in store for Hindalco shareholders?

Novelis IPO, Hindalco Industries share price: After Hindalco's US-based subsidiary, Novelis, informed markets that it filed for a public offer with the US Securities and Exchange Commission (SEC) on Tuesday (February 20), analysts, by and large, hold a neutral to positive view, with most of them suggesting that the move will result in value unlocking for its parent, Hindalco Industries. 
 
In the public offer, the common shares are expected to be offered by Novelis’ sole shareholder, i.e., A. V. Minerals (Netherlands) N.V., a wholly-owned subsidiary of
Hindalco.
 
Novelis will not receive any proceeds from the sale of common shares by its sole shareholder. Novelis expects to complete the public offering after the SEC completes its review process, subject to market and other conditions, according to the company's filing with the exchanges.
 
Pertinently, Novelis' announcement of an IPO comes days after it flagged concerns about a sharp increase in the capex of its Bay Minette project, signalling that the cost overrun at Hindalco's subsidiary can be one possible reason for the public issue plans.
 
Though the details of the IPO with respect of its percentage stake sale and objectives are not clear, the public issue can be expected only after the SEC finishes its review. The process could take a minimum of six months.
 
Earlier this month, the stock of Hindalco Industries came under heavy selling pressure after Novelis' update on the Bay Minette plant. CLSA, in its note, said that the cost and time overrun of its green-field Bay Minette project would be an overhang. Besides, achieving a double-digit internal rate of return, or IRR (revised down from mid-teens earlier), will also be a tough task.

The stock of Hindalco has largely underperformed, with a return of 20.8 per cent as against Nifty's return of 26.7 per cent.

What impact will Novelis IPO have on Hindalco shareholders?
 
Sudip Bandopadhyay of Inditrade Capital is optimistic about the development and sees it as positive for Hindalco shareholders. "Since it's a secondary transaction, funds will come to Hindalco, which presumably will be used primarily for reducing foreign currency debt taken for the acquisition of Novelis," he told Zee Business.
 
The company's net debt as of December 31, 2023, stood at Rs 53,402 crore. Tushar Chaudhari, Equity Research Analyst at Prabhudas Lilladher, noted that the development will result in value unlocking for the parent Hindalco. Further, its US subsidiary Novelis is doing well on both the volume front and EBITDA, but there will be some holding company discount. Nonetheless, as things become clearer and results are delivered, re-ratings at the counter can be expected down the line, the expert added.
 
A holding company discount means that the holding company's market capitalisation is less than the sum of investments it holds. This discount is due to the limited free float of a holding company, tax inefficiencies associated with the holding company, and the additional administrative costs any holding company incurs, as explained by Vernimmen.com.
 
Novelis' adjusted EBITDA during Q3 FY24 scaled 33 per cent year-on-year, led by favourable metal benefits from recycling, higher pricing, and lower operating costs. Nevertheless, net sales in Q3 FY24 stood at $3.9 billion, down 6 per cent YoY, impacted by lower average aluminium prices.
 
Echoing a similar view, Prashanth Tapse, senior VP-Research Analyst at Mehta Equities, said the IPO offer would have a positive impact on the parent company. The company, as per the analyst, will benefit from the value Hindalco Industries created by its overseas investments.
 
The proceeds can be used to fund the ongoing capex or to even give out dividends to Hindalco shareholders, but there are no clear plans on paper. Hindalco's aim is very clear: to unlock Novelis' value and raise cash without increasing net debt.
 
"Overall, this development for us is a neutral to positive outlook, and we will watch the stock's performance and valuation, which will depend on the IPO's outcome. Technically, Hindalco stock has fallen in the last few weeks. Rs 500 acts as a crucial support, which can also be a stop-loss for traders. The upside depends on monthly closing," added the analyst.