Novelis reports $1.8-bn Q3 loss, mostly on high cost of capital

Novelis, the 100% Canadian subsidiary of Indian aluminium major Hindalco, has reported a net loss of $1.8 billion in the third quarter of FY09. The figure includes non-cash, pre-tax charges of $1.5 billion for goodwill impairment, 80% of that is attributed to the rise in the cost of capital. Novelis is the first Indian company to report goodwill impairment, caused by the stock market crash and economic slowdown.

The Novelis loss will be written off against the share premium account in Hindalco?s books, though this will erode the net worth of the Aditya Vikram Birla group company. The $1.8-billion figure also includes $472 million of unrealised losses on derivatives?which hedge exposure to commodities and foreign currencies. Novelis had a net loss of $73 million in the third quarter of FY08.

Martha Brooks, CEO of Novelis, said the loss is quarter-specific, stemming from the global crisis. ?Such write downs are a normal part of businesses in this part of the world. This is a non-cash charge, one-time, and has to do with the global meltdown and the resultant fall in valuations?, she told FE over telephone.

Talking about the business scenario, Brooks said although the business has fallen nearly 30%, Novelis has a prominent place in the cans segment, and it expects to see a turnaround in business by 2010.

The Novelis result is in line with the weakness in world commodity markets. Aluminum prices have crashed more than 50% in the last two months due to the liquidity crunch, which has created uncertainty in metal demand. LME aluminium prices have averaged at $1,828/tonne, down 25% y-o-y, in Q3.

Hindalco acquired Novelis for an enterprise value of $6 billion in February 2007 in a deal that reflected big budget purchases of many cash-rich Indian companies, including Tata Steel. To finance the buyout, Hindalco had taken bridge loans of $3.03 billion from a host of banks. In 2008, Hindalco raised Rs 5,000 crore through a rights issue to replace the bridge loans. The rights issue, however, devolved on the promoters. Tata Steel has also run into cash problems as the steel prices have dipped globally.

Hindalco would create a separate fund?business reconstruction reserve account?out of its share premium account of Rs 8,600 crore to offset the losses from international acquisition and domestic expansion and would not exceed the amount in the share premium account as on December 31, 2008.

?We have set a cap to the amount which is the share premium account of around Rs 8,600 crore. We will not cross that limit and a call will be taken by the board. Moreover, later, if we find that there is an unutilised balance in the business reconstruction reserve, we will then reverse it back to the share premium account,? Sunirmal Talukdar, group executive president & CFO of Hindalco, told FE.

He explained ?We have decided to take it out of share premium because other reserves are free reserves whereas share premium is not a free reserve account, it is a restricted account for particular purposes.?

Hindalco?s shares slipped 1.54% on Wednesday to close at Rs 41.55 on the Bombay Stock Exchange.

According to experts, the other option is to carry the loss of $1.5 billion in Hindalco?s profit & loss account. ?In both cases, (using share premium or showing it on balance sheet) Hindalco?s net worth will be impacted,? said Pawan Burde, an analyst with Angel Broking.

Talukdar said, ?Novelis is the first company that has been hit by goodwill impairment in India, the reason being meltdown in the financial markets and then in the real economy.?

?The increased market cost of capital is primarily due 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,? said Novelis in a statement. The balance 20% is attributed to the projection of Novelis.

Novelis?s shipments to automotive, construction and industrial markets were also significantly impacted by the economic downturn. However, adjusted for extraordinary items, the company recorded losses of $32 million, compared to a loss of $22 million during the corresponding period of last year. Net Sales declined 20% y-o-y to $2.2 billion as a result of lower volumes and LME prices. Shipments of flat-rolled aluminum products declined 13% y-o-y to 633 kilotonnes.