Hindalco eyes $945 million gain from Novelis' US IPO

Hindalco Industries' shares surged by 4.6% to ₹536 per share on the BSE during Wednesday's intraday trading, following the submission of a draft registration statement for an initial public offering (IPO) by its wholly-owned subsidiary, Novelis Inc., to the Securities and Exchange Commission (SEC) of the United States.

Hindalco Industries, a subsidiary of the Aditya Birla Group, is preparing to list its US-based subsidiary, Novelis, on the New York Stock Exchange (NYSE). The offering will consist of 45 million shares, each priced between $18 and $21. This represents approximately 7.5% of Hindalco's existing shareholding in Novelis, as per public disclosures released on Tuesday.

Hindalco Industries stands to gain up to $945 million from Novelis' upcoming initial public offering (IPO), through proceeds from the offer for sale. This valuation places Novelis at a potential market capitalization of up to $12.6 billion. Hindalco originally acquired Novelis in 2007 for $6 billion. The IPO represents the sale of 7.5% of Hindalco's current stake in Novelis, as per public disclosures.

In 2007, Hindalco purchased Novelis for $6 billion, and Hindalco is the exclusive recipient of its earnings. Novelis is currently valued at $10.8-12.6 billion, based on the price range of $18-21. In a separate transaction, Novelis acquired Aleris Corp, a company headquartered in the United States, for an enterprise value of $2.8 billion in 2020.

According to CLSA, this valuation translates to a range of 7.7 to 8.6 times Novelis' earnings. Hindalco's Sum of the Parts (SoTP) analysis incorporates CLSA's valuation of Novelis at 6.5 times FY26 EV/EBITDA.

CLSA retained its 'Buy' rating for Hindalco, setting a target price of ₹770 per share. The primary discussions about the transaction are anticipated to center on the valuation of Hindalco's stake in Novelis, its Sum of the Parts (SoTP) value, and the allocation of funds raised from the IPO.

A media report suggests that the IPO proceeds for the stake sale could reach $1.08 billion if the greenshoe option is exercised, hitting the upper end of the price band. Based on the company's net debt of $4.35 billion, as reported in a US Securities and Exchange Commission (SEC) filing, its enterprise valuation is projected to range from $15.2 billion to $17 billion.

Upon successful completion of its Initial Public Offering (IPO), Novelis will become one of the few subsidiaries of Indian companies to be independently listed on foreign stock exchanges. While common shares are anticipated to be offered by Novelis' shareholders, the company itself will not receive any proceeds from the sale of these shares by its sole shareholder.

"Novelis expects to complete the public offering after the SEC completes its review process, subject to market and other conditions," the statement said.

Considering the buoyancy in US equity markets and expectation of strong prospects, analysts at Prabhudas Lilladher expect Novelis to receive the higher end of valuation.

The brokerage maintained its 'buy' rating on Hindalco stock with a with 6.5x EV multiple to Novelis and 5x to India business, as Novelis performance is improving in the near term and India business will improve on higher LME, it said.

On May 28th, Hindalco shares marginally increased to ₹680.00 on the National Stock Exchange (NSE). Over the past year, the stock has surged by approximately 62%, surpassing the benchmark Nifty 50, which has gained 23% in the same period. 

According to a Business Standard report, analysts at Centrum Broking had arrived at a market cap of ₹80,121 crore for Novelis in May 2023, translating into about $9.7 billion at current INR/$ rate of 82.90.