Novelis: The shine is off

Weak cash flows of Hindalco’s overseas subsidiary are worrying.

Martha Finn Brooks says Novelis is making adjustments in line with lower demand levels expected in the near term. With her firm’s shipments falling 13 per cent in the December quarter, she’s reducing production and cutting costs aggressively. Prices for aluminium are down 50 per cent since the start of September to $1310 per tonne and inventories are piling up; at 29.48 million tonnes, these are close to 15 year highs.

The president and COO of the rolled products firm has little choice. Novelis’ operating profit has remained sequentially flat in the December quarter at close to $70 million for the December 2008. Given that shipments saw a sharper fall than in recent quarters, the cost cuts seem to be paying off. The impairment charges of $1.5 billion, though a non-cash entry, will bring down the reported earnings as also the net worth. That would result in a sharp rise in the net debt to equity ratio to over 1.5 given that the net debt is around $2.6 billion.

While lenders may choose to ignore such charges, they may be worried that the cash used in operating activities has turned negative at $434 million at the end of nine months to December 2008. The weak cash flows are also worrying for parent Hindalco because it has recourse to a major portion of the debt on Novelis’ books.

For Novelis to be back in the black revenues need to gain momentum — in the nine months to December 2008, they were down just under 2 per cent at $ 8.2 billion. Sales of beverage cans, which account for a large chunk of Novelis’ top line, have been relatively stable during the December 2008 quarter. But that’s not enough — other key customer segments such as autos and construction aren’t really doing too well.

While production cuts to the tune of 4-5 million tonnes globally have been announced over the past couple of months, whether these will be implemented remains to be seen, especially in China. Already, about two-thirds of the world’s production is being done at costs that are unremunerative.