Billion dollar bets pay off
Last week saw two of the biggest bets taken by top corporate houses starting to pay off. Tata Motors and Hindalco, which had made billion dollar cross border acquisitions in the past, are now reaping benefits after almost two years of pain.
Both have seen a positive surprise in the earnings of their subsidiaries, Jaguar Land Rover in case of Tata Motors and Novelis for Hindalco. In fact, good performance of the subsidiaries has partly offset the poor performance of the Indian arm.
Novelis,which announced its results on Thursday, declared a loss of $1 million for the last quarter of the financial year 2010. However, the company also recorded an operating profit of $231 million for the period — above street expectations. For the full year, Novelis recorded a profit of $405 million, vs a loss of $1,910 million in financial year 2009. “It has transformed itself, has cut costs aggressively, renegotiated contracts successfully, and is now on track for growth,” says Macquarie, a brokerage house, on Novelis.
Macquarie expects the stock to be an outperformer and has a price target of Rs 190 on Hindalco — about 25 per cent higher than the current market price.
Another brokerage, HSBC, feels that better performance by Novelis could help offset weakness in Hindalco’s Indian business — due to the weakness in base metal prices. Hindalco had acquired Novelis in early 2007 for a valuation of $6 billion. Meanwhile, Tata Motors recorded a net profit of Rs 2,517 crore for financial year 2010 against a loss of Rs 2,465 crore in financial year 2009.
Significantly for the company, subsidiary Jaguar Land Rover turned profitable during the year with. Operating margins from the Indian business have been below expectations, notes the broker JP Morgan, while JLR has surprised with a jump in margins. The improvement has come on better pricing and higher sales, notes the broker.
Despite the crisis in Eurozone, there is optimism about the future. The company is a net receiver of US dollar and a net exporter of Euro, notes Citi.
This means that if the dollar goes up against the Euro, JLR should benefit. Tata Motors also makes it to the buy list of brokers such as JP Morgan and Macquarie. JLR had been bought by Tata Motors in 2008, for $2.3 billion.
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