Hindalco: Withering gains

STOCKS IN THE NEWS

Hindalco was hammered last week after the company agreed to acquire Novelis Inc, the world's leading producer of aluminum-rolled products, for $6 billion in an all-cash transaction. Of the $6 billion, $2.4 billion will be debt and $3.6 billion in cash.

The stock was down over 12 per cent on this news with weekly trading volumes in cash segment up from 25.55 million shares to 67.26 million shares. In derivatives, operators cut their open positions by 11.60 million shares to 39.42 million shares, an indication that the worst is over.

The stock recovered from its 52-week low of Rs 138.75 on the day of announcement to close at Rs 151.50 on Thursday. The stock fell initially on analyst view that Novelis valuation is unjustified and the deal is EPS dilutive.

Although Novelis has a leading 20 per cent share in global rolled aluminium market, it has limited pricing power in a scenario of rising aluminum prices and, hence, analysts consider it as loss making in CY2006.

Aluminum outlook remains negative, and according to analysts, Hindalco would underperform the market with aluminium prices expected to fall 23 per cent in FY08.