In May 2023, Centrum Broking estimated the implied market cap of US-based aluminium manufacturer, Novelis, at approximately $9.7 billion.
It was an “implied” market cap as Novelis is an unlisted entity, wholly owned by AV Minerals of the Netherlands, which in turn is under the full ownership of Kumaramangalam Birla’s flagship Hindalco.
With Hindalco’s recent move to seek SEC approval for an IPO, this implied valuation may soon translate into an actual market cap as AV plans to sell part of its stake. However, there are no details beyond the fact that the IPO proceeds will benefit AV, with no direct financial impact on Novelis’s balance sheet. What Hindalco intends to do with the proceeds is still unknown.
Hindalco has a market cap of around $13.8 billion and Novelis contributes 62-65% of Hindalco’s consolidated revenue and around 56% of profits before interest and tax (PBIT). The valuation of Novelis would therefore be logically some large fraction of Hindalco’s market cap.
Another valuation exercise, post the announcement was done by Nuvama which assessed the likely implied market cap of Novelis at $9.6 billion–around the same as Centrum albeit nine months down the line. It would not be unreasonable to hope to get a valuation of around $10 billion and anything over that might be considered a good deal for Hindalco.
A TV news channel has, however, claimed that the IPO could value Novelis at $15 billion. On the face of this, it seems absurd. Novelis cannot reasonably be valued higher than Hindalco.
Stranger things though have happened in the past since markets can be irrational. But this is not a tech unicorn. This is a mature commodity business where investors can look at peer businesses and compare decades worth of financial data. Industrial metals like aluminium and copper are cyclical, but the supply and demand equation is well understood.
Recent developments have also cast shadows on Novelis’s valuation prospects, particularly after a projected year-long delay and cost overrun in its Bay Minette facility expansion. The management told investors the expansion would cost around $4.1 billion instead of the originally budgeted $2.5 billion. The news knocked 12% off the valuation of Hindalco.
Hindalco bought Novelis for around $6 billion in 2007 and Novelis subsequently paid $2.8 billion to acquire Aleris in 2020. If those deals were made at rational valuations, it’s hard to see an IPO valuation that moves much beyond $10 billion valuation mark for Novelis.
Given the lack of details about the IPO, it’s hard to be more specific. Sure, this deal should unlock some value and if Hindalco is smart about deploying the cash, it should boost returns for the base metals major. But it is unlikely to supercharge earnings.
Despite the initial positive market reaction to the IPO news, with Hindalco’s stock rising 5%, the enthusiasm was short-lived, reflecting the market’s wait-and-see approach to more IPO details. While analysts remain bullish about Hindalco, projecting a 10-15% upside within a year, the overall sentiment is one of cautious optimism. Watch out for more details on the IPO.
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