Debu Bhattacharya has reason to smile. Novelis, which was acquired by Hindalco in 2007 for around $6 billion, staged a turnaround in 2009-10 to post a net profit of $405 million. That might not be a stupendous number, but few believed Novelis would be back in the black so soon; after all, it had reported a net loss of $1910 million in 2008-09. The managing director of Hindalco says some cost-cutting initiatives, a bit of restructuring and more favourable contract terms have done the trick. As Phil Martens, Novelis president & COO, said recently, ?In 2009, we targeted annualised costs savings of $140 million and we have achieved this goal almost two full quarters ahead of schedule.?
Indeed, looking back, it would seem that Novelis has always been a problem child. It was born in early 2005 as a result of a ?forced? spin-off from its parent, the $23.6-billion aluminium giant and Canada-based Alcan. In 2003, Alcan won a hostile offer to acquire the French aluminium company, Pechiney. But the acquisition produced an unwanted result?Novelis. In fact, Kumar Mangalam Birla, chairman of the Aditya Birla group, faced criticism from several quarters for buying Novelis; the Hindalco stock crashed 14% soon after the announcement on February 12, 2007. That?s despite the fact that a merger with Hindalco would have produced the world?s biggest rolled aluminium products-maker and the fifth largest integrated aluminium manufacturer.
As Bhattacharya points out, Novelis has delivered a stellar set of numbers in 2009-10, posting an adjusted operating profit of $754 million, a 55% jump over the adjusted operating profit of $486 million in the previous year. The numbers are impressive because the company was actually impacted by the not-so-conducive market conditions in most of its markets during the first half of the year. Novelis? shipments of aluminum rolled products fell by 2% to 2,708 kilo tonnes compared to the previous year.
Bhattacharya says he tried to replicate at Novelis what he has been doing back home in terms of cutting costs. ?We cashed in on the growth in emerging markets like South America and Asia and we also tried to minimise the loss in shipments,? he explains. Along with cost-cutting initiatives, Novelis, he explains, has also shifted its focus from a volume-driven company to a profit-driven one. The company will continue to focus on operational improvements, with the adjusted operating profit in 2010-11 expected to exceed $1 billion compared with $754 million in 2009-10. During the March 2010 quarter, Novelis reported free cash flows of $355 million, compared with $213 million in the preceding quarter. The key to this was controlled capital expenditure and better working capital management.
At the time of the Novelis acquisition, experts has questioned the viability of acquiring a downstream company at a time when the whole world was going upstream. In the metals sector, downstream implies value-added high-tech products, while upstream relates to mining. It?s true Novelis was bought at the peak of a commodities boom, when the prices of metals such as copper and aluminium were ruling at record levels, almost double the prices seen the year before. It was also a time when some of the world?s largest metal firms, including BHP Biliton, Rio Tinto, Xstrata and Vedanta, were on the lookout for businesses. On the face of it, Novelis was a good strategic fit for Hindalco; the Indian aluminium producer could ship out its primary aluminium from India to Novelis to add the value. In other words, the businesses of Hindalco and Novelis would result in an integrated producer with low-cost alumina and aluminium facilities combined with high-end rolling capabilities and a global footprint. And it would give Hindalco both scale and a bigger overseas presence.
As Bhattacharya observes, ?We are building low-cost upstream facilities and buying high-end downstream facilities. Novelis is one such example. We are expanding our greenfield capacities, too, because India is the lowest cost producing point and growing downstream by buying companies that have high product technology and brand. We are also attempting to keep volatility in check by incubating with copper mines. Australia is the first place where we have plans,? he adds. Novelis will also benefit from new contracts that are being renegotiated; the company had suffered in the past because of low contract prices. At one point, prices shot up by over 25% soon after the company had signed up contracts.
With a strong balance sheet?liquidity at Novelis improved to over $1 billion at the end of 2009-10, representing an increase of 163% from $390 million reported at the end of 2008-09?the company is in a much better shape today. Hindalco?s consolidated balance sheet, too, is stronger; the debt-to-equity ratio has dropped to a very reasonable 1.1 times from 1.8 times a year ago. Going ahead, analysts believe the outlook for Novelis this year is fairly bright, though aluminium prices have started coming off. The management expects regions such as Asia and South America to continue to drive growth, even as developed markets trudge back to normal growth levels. The company will continue to invest in South America and will also acquire additional capacity in Asia, spending $250 million next year or around 2.5 times the amount spent in 2010. Clearly, Hindalco has proved its mettle.