Moody's warns Novelis of rating downgrade

Hindalco subsidiary may get 'default' rating due to weak performance

Global rating agency Moody's has placed the debt of Novelis, the Aditya Birla group's aluminium can maker, under review for downgrade to a probable default rating.

In a release issued from New York on Friday, Moody's said the Hindalco subsidiary's weak financial performance had led to a deterioration in its debt profile.

Novelis is the world's largest producer of rolled aluminium products. The company was taken over by Hindalco in 2007 for $6 billion. Birla officials were unavailable for comment on the possible downgrade.

Moody's said the review of downgrade was due to a contraction in the Ebit (earnings, before interest and tax) to interest ratio - to 1.7 times for the 12 months ended December 31, 2013 - and an increasing leverage position as seen by the debt/Ebitda (earnings before interest, tax, depreciation and amortisation) ratio worsening - to 6.9 times for the comparable 12-month period from 5.6 times in the financial year ended March 31, 2013. This reflects both a lower Ebitda level and an increased level of debt outstanding.

Analysts said the impact of a possible downgrade of Novelis would not be significant on Hindalco. "Novelis has an Ebidta generation of $1 billion a year and accounts for 60 per cent of Hindalco's consolidated Ebidta. Financially, Novelis is in a comfortable position," said Centrum Broking's Abhisar Jain.

Moody's said many challenges were facing the aluminium industry, despite an improving shipment profile. These include weakness in the North American beverage can market and an increased competitiveness in the Asian markets, which continue to exert pressure on earnings and margins of the company.

Novelis is facing a relatively high capital expenditure, as it continues its strategic investments in automotive sheet finishing capacity to meet increasing demand for aluminum from the automotive industry.

Novelis ships its products to the can sheet market, with most of its production going to the electronics and high-end specialties and automotive markets.

Moody's said its review of Novelis' debt would be based on the outlook for shipments and conversion premiums within the company's geographic operating regions, the ability to reduce costs and planned capital expenditure levels. In addition, the review would focus on the time horizon over which improved performance (due to the benefit of higher value-added automotive business), would be realised, it said.

During the 12 months to December 31, 2013, Novelis generated $9.8 billion in revenues and shipped 2.8 million tonnes of rolled aluminum.

WHY IT MIGHT HURT HINDALCO
In FY13, Novelis accounted for:

* 67% of Hindalco's consolidated revenues (about Rs 80,000 cr)

* 64% of consolidated Ebitda (Rs 7,837 cr)

* About 36% of consolidated profit after tax (Rs 3,060 cr)