Crisil downgrades Hindalco's NCDs

Mumbai June 16 Ratings agency Crisil has downgraded its long-term rating on Hindalco Industries Ltd's non-convertible debentures aggregating Rs 1,039 crore to `AA/Stable' from `AAA/Rating Watch with Negative Implications'.

The rating had been placed on watch in February 2007 following Hindalco's offer to acquire Novelis Inc .

Interest Burden

The acquisition was completed on May 15. The downward revision in the long-term rating reflects the increase in Hindalco's financial risk after this largely debt-funded acquisition, said a statement from Crisil.

"The incidence of a large amount of debt (estimated at $3.1 billion) for funding the acquisition will impact Hindalco's capital structure. Novelis's profitability and cash accruals are expected to remain subdued over the medium term; therefore, Hindalco will be required to support the large interest burden arising from the debt-funded acquisition," it said.

Dominant Position

Although Crisil expects that over the next 18 months Hindalco will replace part of the debt with equity, Hindalco's large capital expenditure plan of Rs 15,000 crore over the next five years, for capacity enhancements in aluminium and alumina, will preclude any material improvement in Hindalco's capital structure and debt protection indicators. The company's financial risk profile is is likely to be strained over the next three to four years, said the ratings agency.

The ratings continue to reflect Hindalco's dominant position in the domestic aluminium and copper industries in which the company accounts for almost half of India's installed capacities.

Synergy Benefits

The `stable' outlook incorporates Crisil's expectation that Hindalco's strong business profile will help sustain the ratings at the current level, despite medium-term weakening in the financial risk profile due to the largely debt-funded acquisition and implementation of large capex plans.

Crisil expects Hindalco to continue to operate with high financial leverage over the medium term.

Correction in the capital structure, through further equity infusion, or higher-than-expected synergy benefits through faster integration, could lend a positive bias to the rating. Conversely, delayed or lower-than-expected equity infusion, large debt-funded capex/acquisitions, or delays in integration, could result in a negative bias to the rating.