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NALCO 2QFY11: Below est; Coal costs increased due to lower linkage supply; Maintain Sell
- Nalco (NACL IN, Mkt Cap US$5.9b, CMP Rs407, Sell) 2QFY11 PAT increased 41% YoY to Rs2.2b. Results were below our estimate of Rs3.3b due to lower than expected Alumina realization and higher than expected power and fuel cost due to seasonal reasons.
Aluminium volumes up 3%; Alumina sales up 38%
- Net Sales increased 25% YoY to Rs14.8b. Production of Alumina increased 14% YoY to 432,000 tons and that of Aluminium increased 7% YoY to 110,333 tons.
- Sales of Aluminium increased 3% YoY to 108,515 tons. Alumina sales increased 38% YoY to 226,032 tons.
- The implied average realization for 3rd party alumina sales at US$316/ton came in tad lower than estimates.
Coal costs jumped; CoP of Aluminium at US$1848/ton
- EBITDA increased 24% YoY to Rs3.5b below our estimate of Rs4.9b as cost of production of Aluminium smelting went up due to higher cost of coal for captive power generation. Cost of coal increased, because Nalco had to buy more of washed/imported coal as linkage coal supply from Coal India was reduced during the quarter.
- According to our calculations, the cost of production (CoP) of Aluminium was US$1,848/ton (incl depreciation) i.e. an increase of US$168/ton QoQ.
Growth projects visibility low; FY11 EPS cut 6%; Maintain Sell
- Expansion of Alumina capacity to 2.1mtpa from 1.6mtpa currently is expected to be completed by end of FY11. Though Nalco is trying aggressively for number of expansion projects, the actual work on ground is still many years away.
- At the end of 2QFY11, cash and equivalents stood at Rs36.6b i.e. an increase of Rs5b in last six months.
- We have cut FY11 EPS by 6% to Rs18.1 to factor in below expected results. Also, we have changed LME assumption from US$2,000/ton to US$2,100/ton and US$/INR rate from 46 to 44.5.
- Stock is trading at rich valuations – FY12E P/E of 18x and EV/EBITDA of 9.3x. Maintain Sell.
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