Edelweiss:: Key takeaways from the NALCO Q3FY11 result concall

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

NALCO (NACL IN, INR 422, Reduce)

Key takeaways from the NALCO Q3FY11 result concall:

n  Costs marginally reduced but still at elevated levels

Alumina and aluminium cost of production for the quarter was INR 11,786/t and INR 92,830/t, respectively. Aluminium cost declined by ~INR 2,000/t Q-o-Q largely due to unit power costs, which declined Q-o-Q to INR 2.2/unit from
INR 2.6/unit in Q2FY11. This was largely due to coal linkage proportion which increased and was 85% in Q3FY11. The balance 15% was sourced through e-auction and imports. While import coal cost is INR 4,700/t, e-auction price, which was INR 2,200/t in Q3FY11, has increased to INR 2,600/t in January 2011.

However, cost of consumables, employee costs and repair & maintenance expenses jumped sequentially for NALCO. Management has guided for further increase in employee costs on account of rise in DA expenses and repairs expenses are likely to be recurring at these levels as refinery and smelter being old are now subject to frequent maintenance charges.

n  Mining from captive coal block to commence from FY14

NALCO has been allotted a coal block in Utkal with reserves of 30 mt.  While the land acquisition is complete, company expects mining to commence from FY14 due to time-consuming rehabilitation process. Target production is 2 mtpa and landed cost is likely to be INR 1,400-1,500/t. Capex to develop the mine is INR 4 bn.

n  Alumina refinery further delayed; completion by April 2011

Management has indicated that 0.5 mtpa brown field alumina expansion is likely to be completed by April 2011 (earlier January 2011). Capex guidance for FY11 and FY12 is INR 9.8 bn and INR 12 bn, respectively (earlier higher at INR 14 bn).

n  Outlook and valuations: Stretched valuations; maintain ‘REDUCE’

We do not see any upsides to our earnings given that there is limited volume growth for NALCO and costs have generally been higher than expectation. We maintain ‘REDUCE/Sector Underperformer’ recommendation/rating on the stock with fair valuation of INR 327/share.