Novelis, the 100 per cent Canadian subsidiary of Hindalco declared its third quarter results for 2009. Among other things, the numbers include $ 1.3 billion impairment in the value of goodwill and USD 160 million write-down of its investment in Aluminum Norf GmbH. This, the company says will be written off against part of the share premium lying in the books of Hindalco, thus bearing heavily on the company's consolidated networth.
Financial restructuring
In what the company describes as financial restructuring, the plan, approved by the board, says that the company would be creating a separate fund called 'Business Reconstruction Reserve Account' out of its share premium account of Rs 8600 crore. This corpus would be used to make good the expenses incurred by the company on international acquisition and domestic expansion and would not exceed the amount lying in the share premium account as on December 31, 2008.
The company, in a press statement, supported its stand by saying that the current conditions in stock, debt and physical markets have resulted in goodwill and other asset impairments in a number of US and international companies, including those in the commodities space.
Impact on financials
There are two methods in which this write off will be done:
One: The company gets regulatory approval to take the write offs through the share premium account.
Two: If it does not get regulatory approval then it will have to take this hit through P&L account.
The impact: In either case, the networth of the company will be hit. This will considerably bring down the book value of the company.
Implications on the stock price: Analysts may downgrade the stock further post write-offs made by the company. Hindalco has not yet disclosed the amount it will use to write-off from its networth.
The changes include:
- The increased market cost of capital, which is due primarily to the significant deterioration in the capital markets during the third fiscal quarter. The market cost of debt required in these calculations is significantly higher than the interest rates on Novelis' existing debt.
- The related decline in the market capitalization of both our parent company, Hindalco Ltd., and other industry participants. The relative public equity values of a company, its parent, and other industry participants are significant inputs in business valuation models under US GAAP.
- The impact of the global recession on our near-term operating forecast, although the long-term outlook for the business remains positive.
There is a related decline in the market capitalization of both its parent company, Hindalco Limited, and other industry participants. The relative public equity values of a company, its parent, and other industry participants are significant inputs in business valuation models under US GAAP.
Current conditions in stock, debt and physical markets have resulted in goodwill and other asset impairments in a number of US and international companies, including those in the commodities space.
Analysts say that Novelis has posted okay numbers. Post tax numbers are on the expected lines. If one looks at pre tax numbers of USD 32 million then its not bad earnings. The stock is trading at 0.4 times to its book value. The stock is trading at 7-8 times FY10 earnings with debt-equity of more than 2. All brokerage houses have either put sell or underperform rating as profitability to worsen sharply in 4QFY09.
With current aluminium prices 23 per cent lower than the 3Q average, analysts expect aluminium division margins to contract sharply in 4QFY09. The outlook for global aluminium demand remains weak with continued weakness in end-user industries and a near-term recovery looks unlikely with soaring inventory levels. Hindalco’s cost of aluminium production is unlikely to see a meaningful decline as analysts do not expect any drop in linkage coal prices and third-party bauxite procurement prices.
The relief from fall in prices of other raw materials like CP coke, caustic soda and CT pitch is unlikely to be big enough to buffer profitability. Hindalco’s copper division will benefit from the recent improvement in copper TC/RCs in FY10. However, this will be offset to some extent by sharply lower by-product prices.
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