Hindalco seeks equity financing to cut debt

India’s biggest aluminium producer aims to raise $500 million via a qualified institutional placement to help reduce leverage on its balance sheet.

Hindalco Industries launched a qualified institutional placement (QIP) of new shares on Thursday, turning to stock market investors for fresh capital ahead of an imminent debt repayment exercise which begins later this month.

India’s largest aluminium producer has capped the fundraising amount at $500 million, which is about two-thirds of the Rs50 billion ($748 million) quota approved by the board of directors late last year. The cash call could boost its cash level by nearly 80% to $1.1 billion from the current $644 million.

The new shares will be offered at a floor price of Rs183 ($2.74) per share, implying a 3.4% discount to the stock’s Thursday close of Rs189.45 on the National Stock Exchange of India.

For the arrangers, it is clearly not the easiest deal to execute. The QIP is the largest of its kind in nearly a year and a half since Indiabulls Housing Finance’s $600 million deal in September 2015. 

Since the deal is being launched at a time when India’s benchmark Sensex index is at a two-year high, it remains to be seen how much upside is left for investors picking up shares through the QIP.

Shares of Hindalco Industries are also in the middle of a strong run, gaining over 200% since hitting a trough of Rs61 in February last year; they now trade near their all time-high of Rs232.

That comes despite weaker-than-expected results for the quarter ended December last year, with earnings before interest, taxes, depreciation, and amortisation (ebitda) growing only 2% and aluminium output falling 3% on a quarterly basis amid soaring raw material costs.

Hindalco Industries will hope investors remain bullish on the company’s prospects as the aluminium price rebounds, allowing it to expand profit margins in its downstream business.

Prices of three-month aluminium futures were quoted at $1,937 per ton on Thursday, up nearly 30% since the beginning of 2016, when prices slumped as low as $1,400 per ton.

From an operational perspective, the cash call could also help Hindalco Industries return to an expansion mode by reducing its debt level. The discounted QIP is part of the aluminium maker’s long-term deleveraging plan to cut its debt level by 33% to three times its ebitda.

Due to the heavy debt load, Hindalco Industries has kept capital expenditure low over the past two years. Chief executive Satish Pai said earlier the company would not take up any big project until the deleveraging process was completed.

Hindalco Industries is due to repay $209 million of debt by the end of March, while it is still subject to a large debt bill of $8.7 billion in the long term. In order to settle the debt, the company has announced plans to sell its alumina refinery and bauxite mines in Brazil.

According to a termsheet seen by FinanceAsia, the shares will be priced on March 7 and the new shares will be tradable on March 15.

Book running lead managers of the transaction are Axis Capital, Bank of America Merrill Lynch, Citigroup, JM Financial and SBI Capital.

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