Nalco - It’s getting boring: Macquarie

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Nalco
It’s getting boring
Event
􀂃 2Q results well below estimates: Nalco reported 2Q results below our
estimates due to higher-than-expected energy costs. We maintain our
Underperform recommendation and target price of Rs291. The stock has
been flat in the last six months and excessive valuations appear to have
reduced investor interest. It remains extremely expensive, in our view, and we
recommend a switch to Hindalco (HNDL IN, Rs210, OP, TP: Rs240), which is
our preferred aluminium play.
Impact
􀂃 Weak 2Q results – hit by costs: Net sales at Rs14.5bn were up 13% QoQ
due to strong alumina volume, partially offset by low aluminium realisation.
However, EBITDA at Rs3.2bn was down 14% QoQ due to higher energy
costs which were up 10%. Net profit at Rs2.2bn is down 21% QoQ.
􀂃 FY11 estimates have marginal downside risk: Nalco reported EBITDA of
Rs17.5bn and PAT of Rs14.2bn in 1H FY11, 40% and 36% of our full-year
estimates, respectively. There could be some downside risk to our estimates,
but we are counting on 1) the expansion of its alumina refinery from 1.57mt to
2.1mt to be completed by Jan FY11, 2) high aluminium prices which are
currently at US$2,316/t as compared to reported realisation of US$2,193/t in
2Q FY11, and 3) additional revenues from its 120MW unit commissioned at
Angul.
􀂃 Coal procurement remains an issue: Nalco has had issues in getting
adequate coal from its linkages from Coal India and had to resort to expensive
imported coal. With the increased capacity of its captive power plant, Nalco
will need to rely more on imported coal, increasing costs. Its coal mine
development also remains 1-2 years away.
􀂃 Aluminium – long-term outlook is shaky: Our global commodities team
believes that aluminium prices could remain strong in the short term due to
balanced supply from China and strong demand. However, in the medium
term, it will underperform given high stock overhang. Nalco, being a pure play
aluminium company, is highly leveraged to aluminium prices and could be
hurt by weakness in the aluminium market.
Earnings and target price revision
􀂃 No change.
Price catalyst
􀂃 12-month price target: Rs291.00 based on a Price to Book methodology.
􀂃 Catalyst: Lack of volume growth and decline in aluminium prices.
Action and recommendation
􀂃 Maintain Underperform: We do not see any positive catalysts for the
company and the stock looks extremely expensive, trading at a 24x PER on
FY12E and 2.6x P/BV. The company’s high valuation continues to baffle us,
and given the deferral of its FPO, this is unlikely to be corrected.