Hindalco shares jump 5% after Novelis receives clearance for Aleris acquisition

Shares of Hindalco Industries climbed 5 percent in morning trade on BSE on April 9, buoyed by reports that Novelis has received the final regulatory clearance for the Aleris acquisition.

Novelis, the wholly-owned subsidiary of Hindalco Industries, has received the final regulatory clearance needed to complete its acquisition of Aleris. The European Commission (EC) has approved the Liberty House Group as a suitable buyer of the Duffel facility.

As per a report by CNBC TV18, JPMorgan has an 'overweight' call on Hindalco with a reduced target price of Rs 170 from Rs 195 earlier.

JPMorgan said the acquisition of Aleris in the new economic environment may be earnings dilutive in the short-term. "We ascribe a negative equity value of Rs 30 per share for the Aleris transaction," said JPMorgan.

JPMorgan expects a sharp volume and margin cuts at Novelis and lower EPS by 30 percent.

On the other hand, Kotak Institutional Equities has a 'buy' recommendation on Hindalco with a target price of Rs 225.

"The Aleris acquisition would increase Hindalco’s debt by $2.2 billion in the interim till they divest the Lewisport plant, which in the current environment could take 9-12 months. We estimate net debt/EBITDA to increase to 4.4 times in FY2021E given earnings hit led by COVID-19," Kotak said.

"With interest coverage of 2.5 times and FCF generation, we see the near-term spike in leverage manageable. Nonetheless, increase in leverage is discomforting given downside risk to earnings in FY2021E if COVID-19 led disruptions extend beyond one quarter," Kotak added.

The brokerage believes the stock is pricing in the uncertainty at current at 0.5 times P/B (ex-goodwill) FY2022E versus historic mean of 1.1 times and in line with 2008/2015 trough of 0.4 times.

Kotak finds risk-reward attractive at 4 times EV/EBITDA FY2022E versus historic mean of 6.5 times.