How Novelis Share Sale Would Unlock Value For Hindalco
The shares are expected to be offered by Novelis's sole shareholder, Hindalco Industries. Novelis would not receive any proceeds from the sale of shares by its sole shareholder.
Shares of Hindalco Industries Ltd. surged almost 5% on the BSE in Wednesday's early trade as its U.S. subsidiary Novelis filed confidentially for an initial public offering with the Securities and Exchange Commission.
The shares are expected to be offered by Novelis' sole shareholder, Hindalco Industries. Novelis would not receive any proceeds from the sale of shares by its sole shareholder.
"The main motive of Novelis listing is value unlocking," Rakesh Arora, managing partner, Go India Stocks, told NDTV Profit. "Have to wait and watch how much of the IPO proceeds come back to the investor. Looking at better valuations for Novelis than what the street was expecting."
Hindalco's plan to take Novelis public was revealed days after the U.S. arm reported a sharp escalation in capital expenditures last week. It upwardly revised the cost of its green field project, Bay Minette, to $4.1 billion.
This is a surprise move post recent negative news on Novelis capex overrun, as per analysts at PhillipCapital, and they believe the intentions seem to unlock the value of Novelis.
"It is still unclear how many shares the promoter shall sell along with the timeline too. However, we believe it would take at least six months if everything went smoothly," said Nuvama in a note.
Hindalco acquired Novelis in 2007 in a $6 billion, all-cash transaction deal. The U.S. arm contributes over 60% to Hindalco’s revenue.
Key Questions
A few important questions that are yet to be answered, as per PhillipCapital, are:
The extent of stake dilution.
Why IPO when Hindalco domestic business is not in need of money.
How will Hindalco deploy the money once the offer is completed.
The usage of money that would be received post-share sale is unclear.
Hindalco has net cash of Rs 3,400 crore at Q3 FY24-end, and future capex can be met via internal accruals, as per analysts.
"We do not have a clear answer to those questions; however, we cannot rule out the possibility of this money going to support Vi (the telecom venture) or expediting the domestic growth capex (have plans from a greenfield 850Kt alumina refinery in Odisha and 180Kt brownfield smelter in Aditya/Mahan)," said PhillipCapital in a note.
Valuation Metrics
Nuvama has assigned 6.5 times EV/Ebitda to value Novelis on FY26 earnings, while its derived market cap is $9.6 billion, or Rs 361 per share of Hindalco.
Prabhudas Lilladher is also valuing Novelis at 6.5 times the EV of March 2026E Ebitda, with an estimated value of Rs 1.28 lakh crore.
"As we already provide a higher valuation multiple to Novelis, this event may not provide any case for a re-rating (for Hindalco). In fact, the listing of shares may attract a Holdco discount too in the future," said Nuvama.
