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Q2FY11 PAT below expectations
National Aluminium Company (NALCO) reported Q2FY11 net revenues of INR
14.7 bn against our estimate of INR 13.8 bn. This was largely due to higherthan-
estimated revenues in the electricity segment. Aluminium production, at
109 kt, was largely in line with estimates. PAT came at INR 2.2 bn (our
estimate: INR 2.9 bn, consensus: INR 3.0 bn). Tax rate came higher at 34%
against our estimated 28%.
Costs increase by INR 10,000/t Q-o-Q
EBITDA, at INR 3.5 bn, was below our estimates of INR 4.1 bn. This is was
largely due to higher-than-estimated power costs, up 35% Q-o-Q. Owing to
reduced supply coal from Coal India (CIL) during the monsoon quarter, the
company imported 0.2 mt of coal to meet its power requirements. Additionally, it
purchased 114 MU of power from the grid. Average power cost was high at INR
3.1/unit. Management guided power cost to reduce to INR 2.1-2.2/unit in
H2FY11 as proportion of linkage coal increases. Overall, costs have gone up by
INR 10,000/t sequentially. Thus, margins have declined 660bps Q-o-Q. However,
other raw material costs are down Y-o-Y, which is a marginal positive.
Alumina refinery expansion delayed by couple of months
The 0.5 mt brownfield alumina expansion, which was to be completed by
December, is delayed by a few months. We have assumed project completion by
March 2011 in our estimates. Further, we see limited progress on the greenfield
projects which are yet to be launched.
Outlook and valuations: Stretched valuations; maintain ‘REDUCE’
With no notable volume growth likely in the medium term and the company
struggling to keep its power costs under control, we do not foresee any
significant upside to our earnings. Based on our current earnings estimates for
NALCO, we arrive at fair valuation of INR 341/share. We maintain our
‘REDUCE/Sector Underperformer’ recommendation on the stock.
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