National Aluminium Co : valuations unattractive; UW : JPMorgan

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National Aluminium Co Ltd
Underweight
NALU.BO, NACL IN
While aluminum environment incrementally better,
valuations at 9.3x FY12 EV/EBITDA unattractive;
Remain UW





• Q2FY11 below estimates: NACL reported Q2 EBITDA at Rs3.5bn
(+146% y/y; -12% q/q), 20% below JPM and BBRG consensus estimates of
Rs4.3bn. PAT at Rs2.24bn was also significantly below estimates. Sharp
increase in power and fuel expense (+34% q/q) was the key driver for the
earnings miss.

• FY12E benefits from volume growth, higher alumina and aluminum
prices and YES there should be a scarcity premium…: We increase our
FY12E estimates for NALCO and expect EPS growth of 35% y/y. NACL in
our view benefits from a) higher volumes in alumina; and b) better alumina
and aluminum prices. NACL is also the only pure play aluminum company
in India (and among the few globally) and admittedly deserves a valuation
premium.

• …however, at 9.3x FY12 EV/EBITDA difficult to justify: We remain
UW on our revised Sept-11 PT of Rs325 based on 7x FY12E EV/EBITDA
at a 40% premium to its long tern average of 5x. Current valuations remain
most expensive globally. We see continued cost pressures for key raw
materials and coal costs are likely to remain elevated. INR appreciation
while positive for coal costs, is essentially negative for the company given
the company’s import parity pricing model for aluminum and reliance on
exports for alumina.

• JPM Global View on aluminum: Regarding the impact of Chinese power
cuts on aluminum, JPM Global metals analyst believes that the ‘maintenance
or extension of power restrictions being price bullish, and a reversal in
availability of power, price bearish. Michael in his Base Metals Daily
highlights that ‘The big question mark is for 2011. Should Chinese
authorities maintain a vigilant and aggressive stance on power consumption
in the smelting industry then the country's smelting output could be
constrained to levels that imply massive imports that will tighten the western
world balance so significantly that the western world could potentially post
a 3mio to 5mio tonne deficit. We, however, really doubt that this will happen
but right now it is not entirely clear that Chinese authorities are going to
relax power restrictions in 2011 like we anticipate.’


We remain UW on a revised Sept-11 PT of Rs325 based on 7x
FY12E EV/EBITDA at a 40% premium to its long term average of
5x. Current valuations remain among the most expensive globally.
We see continued cost pressures for key raw materials and coal
costs are likely to remain elevated. INR appreciation while positive
for coal costs, is essentially negative for the company given the
company’s import parity pricing model for aluminum and reliance
on exports for alumina. A key risk to our price target is a continued
increase in LME aluminum prices.