Hindalco shares tank 14 pc on debt, profit worries | india | Hindustan Times
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Hindalco shares tank 14 pc on debt, profit worries

Worries that Hindalco will not see the benefits of the deal, knocked its shares down, reports BS Srinivasalu Reddy.

india Updated: Feb 13, 2007 01:51 IST

After a weekend that saw Corporate India's hopes rise on global ambitions with the acquisition of US-listed Novelis by Aditya Birla group's Hindalco, a sober realisation dawned on Monday as stocks led by the aluminium giant plunged in Mumbai, overshadowed by concerns over the debt incurred in such deals and its short-term implications on profits.

Worries that Hindalco Ltd will not see the benefits of its $5.9 billion deal for some time knocked its shares down as much as 14.5 per cent, though analysts thought the deal made long-term sense. The share ended down Rs 23, or 13.7 per cent.

Perceived high valuations paid by Hindalco and Suzlon Energy, which is in the midst of a bid for European REpower, took the domestic market on a tailspin.

The triggering of stop-loss positions by traders, many of whom take high risks with borrowed money, accentuated the situation and took the BSE Sensex's losses to 348 points, or about 2.4 per cent, by close of trading.

The 30-share Sensex opened closed below 14,500 level at 14,190.70, while Nifty slid by 1239 points to close at 4058.30.  Suzlon was also hammered 13 per cent on Monday.

“The enterprise value of Hindalco at the present market value is sdome where around 5.3 times its EBITDA (operating profit), while its target company shareholders are being offered a price that puts the Novelis’ value at 13 times,” said Manish Sonthalia, senior vice-president of Motilal Oswal Securities.

Hindalco said on Sunday the deal would make it the world's largest aluminium rolling company, doubling its turnover to $20 billion, but it would boost its earnings only by 2010. Hindalco will pay $3.5 billion in cash and take on debt of $2.4 billion under the agreement.

"To get the benefits from the acquisition would take some time. Hindalco has the responsibility to turn it around and it won't happen in a hurry," Reuters quoted Jigar Shah, Director at KR Choksey Shares and Securities, as saying.

Even in the case of Suzlon, the acquisition of REPower would come at the cost of lower profits for at least two years. Suzlon is involved in a battle with global power major Areva for the target company.

The other major reason for the bloated losses of the Sensex was due to the unwinding of futures and options (F&O) positions triggered by the fall in the early trade.

Amid high volumes, the fall in the cash market triggered unwinding of positions in the futures and options segment. “The fall in Zee, Hindalco and Suzlon in the cash market have triggered the stop-loss positions resulting in a further fall in the market,” said Siddharth Bhamre, derivatives analyst at Angel Broking.

However, some players are of the view that this is a correction that was long overdue. The market has shrugged off major negatives like soaring inflation and a possible spike in interest rates in future over the last two weeks, if not over the last couple of months. The market outlook is still in the negative based on technicals.

"It has become a fashion to sell after a company makes an acquisition. The same thing happened when Tata Steel acquired Corus," said Arun Kejriwal, director, Kejriwal Research and Investment Services.

Tata Steel's shares fell 10.7 percent on Jan. 31 after it agreed to pay $12 billion for Anglo-Dutch steel maker Corus Group last month. At Monday close, its shares were 4.4 per cent below their January 31 close.

Hindalco said it would fund the $3.5 billion needed to buy Novelis shares by borrowing $2.8 billion from banks, $300 million from another company in the Aditya Birla group that controls Hindalco, and $450 million from its own reserves.
Investors were also concerned about the impact of the debt on Hindalco's balance sheet, although the company said on Sunday it would maintain its debt-equity ratio at a 'comfortable' level.

"Any leveraged acquisition, particularly a company bigger than yours, is going to have this kind of a result," Shah said.

Email BS Srinivasalu Reddy: srinvasalu.reddy@hindustantimes.com