Novelis may emerge profitable for Hindalco

Aditya Birla group’s Hindalco Industries, which posted lacklustre March quarter results, may find a saviour in Novelis – the US firm it bought in 2007 for $6billion.

Novelis, now its US subsidiary, is expected to report stable or even better-than-expected results on Thursday as it is largely independent of volatility in aluminium prices due to its focus on value-added products, analysts said.

“Novelis is focusing on a custom-smelting business, which is relatively stable and is largely independent of volatility in aluminium prices because of which the company is expected to report stable performance,” said Deepak Poddar, an analyst at Daiwa Capital Markets, in a May 4 report on Hindalco titled `Novelis exposure moderates volatility risk’. Further the expansion plan of the company is also expected to be on track, which will help it to post better, operating margins going forward, said Poddar.

The world leader in aluminium and beverage can is adding 220,000 tonnes of incremental rolling capacity scheduled to come on stream in Brazil by end 2012, and a further 200,000 tonne scheduled to come on stream in North America by mid-2013. The total investments for both the projects are $500 million. “Novelis expansion plan is on track,” he said.

The share prices of Indian aluminium majors including Hindalco have underperformed the BSE100 over the past 6-8 months.

The aluminium prices at LME is currently trading at $2050/t, which is a recovery of more than 10 per cent over the past two months and is up sharply from its December 2011 trough of $1950/t.

Ravindra Deshpande, an analyst at Elara Capital said that Novelis is expected to report stable performance in the quarter and also for the full year. “We expect the company to report earnings before interest taxes depreciation and amortisation of around $300 per tonne in January-March, 2012, whi­ch is more or less flat compared to a year ago period.”

Deshpande said Elara has a buy rating on Hindalco as going forward the company is expected to perform well on back of its expansions in the domestic market as well as decent performance from Novelis.

Sanjay Jain, an analyst with Motilal Oswal said around 60 per cent of Hindalco’s cash flow comes from Novelis and going forward the can manufacturer will report stable performance. Jain also has a buy rating on Hindalco as the valuations of the shares are low. Hindalco is expected to perform better once the company’s domestic and overseas expansions are on stream.