NALCO: Spike in power and fuel cost:: Kotak Sec

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National Aluminium Co (NACL)
Metals
Spike in power and fuel cost causes earnings to fall short of expectations. Nalco’s
2QFY11 revenues of Rs14.8 bn was 5.5% ahead of our estimate. However, EBITDA and
net income at Rs3.7 bn and Rs2.2 bn were below our estimates largely on account of
higher energy costs. We align Nalco’s earnings estimate with our revised aluminium
price forecast and increase our earnings estimates to Rs17 and Rs19.1 for FY2011E and
FY2012E, respectively. We raise our 12-month target price to Rs285 (Rs260 earlier) and
maintain our SELL rating.






Results below expectations
Nalco’s 2QFY11 revenue of Rs14.8 bn (+13.1% qoq, +25.4% yoy) was 5.5% ahead of our
estimate as a result of higher metal deliveries. However, EBITDA at Rs3.7 bn (-9.3% qoq, +109.3%
yoy) was 2% below our estimate on account of the higher cost of production (9% above our
estimates)that was in turn led by higher power and fuel costs. Power and fuel cost increased
34.5% sequentially to Rs5.0 bn, which was 22.3% above our estimates. All other costs declined
sequentially. Employee costs declined 7.1% sequentially to Rs2.0 bn. Other expenditure declined
10.7% to Rs 2.1 bn. Net income of Rs2.2 bn (-21.1% qoq, +40.5% yoy) was 14.4% below our
estimate on account of higher tax outgo during the quarter.
The company achieved metal aluminium production of 110K tons in 2QFY11, up 7% yoy and
marginal decline qoq. Deliveries for 2QFY11 were also up 3% yoy to 108.5K tons; aluminium
metal volumes were flat qoq.


Revision in our estimates, factor in our revised aluminium price forecasts and Re/US$ rate
We align our estimates with our revised aluminium price forecast which increased by 5.1%, 4.9%
and4.5% to US$2,050/ ton, US$2,150/ ton and US$2,300/ton for FY2011E, FY2012E and
FY2013E, respectively. We have also made changes to our Re/US$ assumption, revising it to
Rs45.5 and Rs44.5 for FY2011E and FY2012E, respectively, factoring in the recent rupee
appreciation. In addition, we have made marginal changes to our volume and cost estimates. As a
result, we increase our earnings estimate for FY2011E, FY2012E and FY2013E to Rs17, Rs19.1 and
Rs24.3 from Rs14.3 Rs17.3 and Rs23.2 earlier. The current stock price is discounting aluminium
price of US$2,525/ ton, a bit too optimistic, in our view.


Valuations expensive, maintain SELL rating
Nalco is trading at an extremely expensive valuation of 13.3X FY2011E and 11.6X FY2012E
EBITDA and 23.6X FY2011E and 21X FY2012E earnings. We find the stock very expensive at
current valuations. We revise our FY2012E target price to Rs285/share from Rs260 earlier, primarily
on revision of our aluminium price forecast. Retain SELL on expensive valuations.