Company update: Hindalco Industries (Outperformer) - Aleris acquisition- at a fair value & EPS accretive
Event- Novelis to acquire Aleris at 7.2x 1-year fwd EV/EBITDA
Hindalco, through its 100% subsidiary, Novelis signed a definitive agreement to acquire US based aluminium maker, Aleris at an enterprise value of US$2.58bn. The deal is expected to close in 9-15 months i.e. by 1HFY20E. The management guides EBITDA of US$360m within 1st year of operation after closing the deal which makes the deal valued at 7.2x one year fwd EV/EBITDA. The deal is EPS accretive in the first year of operation (Rs2/share for HNDL) and have positive free cash flows. Importantly, the announcement removes the major overhang on the stock related to usage of cash. Reiterate Outperformer with TP of Rs346, valuing Novelis at 7.0x FY20E EV/EBITDA and India operation at 6.5x FY20E EV/EBITDA.
Details
- Aleris sold 801kt of aluminum rolled products in CY17. It has operations in North America (57% of overall volumes in CY17), Europe (39%) and a marginal presence in China. It now caters to the high margin aerospace & automotive coupled with building & construction and truck tailers market.
- Aleris recorded revenue of ~US$3bn and EBITDA of US$201m (EBITDA/t of US$250) in CY17. The new auto capacity of 200ktpa, commissioned in December 2017 with a capex of US$425m will replace the existing very low margin common alloy product at Lewisport, North America. With this, the volume will remain at ~0.8mtpa but its EBITDA/t will improve further, as automotive is a high margin market. Management guides EBITDA of US$360m (EBITDA/t of US$450) in the first year post closing the deal. It further guides synergy benefits of US$150m to be achieved within 3-5 years.
Our view: Deal earnings accretive; removes major overhang
Assuming the deal to complete by 1HFY20E and Aleris’s EBITDA of US$180m for 2HFY20E, we expect consolidated net debt to increase to Rs494bnin FY20E (Net debt/EBITDA of 2.7x) from Rs393bn in FY18E (Net debt/EBITDA of 2.8x). With Aleris acquisition, HNDL’s ~65% of EBITDA will be based on conversion margin which is more stable in nature. Being in the lowest quartile of the world aluminium cost curve, HNDL’s Indian aluminium operation can withstand any downfall in aluminium prices. We have not included Aleris numbers in our financials. We reiterate Outperformer with TP of Rs 346, valuing India business at 6.5x FY20E EV/EBITDA and Novelis at 7.0x FY20E EV/EBITDA.
Hindalco Industries is engaged in the production and sale of aluminum and copper in India and internationally. Co.'s aluminum products include rolled products, extrusions, foils, primary aluminum ingots, billets, wire rods, and aluminum slabs; and aluminum chemicals, such as standard alumina, standard hydrate and specialty aluminas and hydrates for use in refractories, ceramics, fire retardant plastics, alum, and zeolite applications. Co. also offers aluminum foil and packaging solutions to pharmaceuticals, healthcare, dairy, confectionery, processed foods, personal products, and tobacco industries, as well as to the heat, ventilation, and air conditioning industries.
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