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Nalco’s 3QFY2011 results were below our expectations. The company’s top line
grew by 2.8% yoy to `1,425cr (below our estimate of `1,673cr). Net profit grew
by 65.0% yoy to `256cr (below our estimate of `278cr). In light of rising cost of
production and rich valuations of the stock, we maintain Sell on the stock.
Mixed top-line segmental performance: Nalco’s net sales increased by 2.8% yoy
to `1,425cr mainly on account of increased realisations. The aluminum segment’s
sales increased by 1.5% yoy to `1,159cr during the quarter. However, the
chemicals and electricity segments reported 3.5% and 28.5% yoy decline in
revenue to `491cr and `250cr, respectively, in 3QFY2011.
Higher aluminum realisation leads to margin expansion: The aluminium
segment’s EBIT increased by 459.4% yoy to `348cr. However, the company
reported a loss of `127cr in its power segment at the EBIT level, compared to a
profit of `70cr in 3QFY2010. Consequently, Nalco’s EBITDA increased by 31.6%
yoy to `390cr and net profit increased by 65.0% yoy to `256cr in 3QFY2011.
Outlook and valuation: Although Nalco enjoys high levels of backward
integration, its aluminium cost of production remains very high. Given the high
levels of inventories at LME warehouses, we believe there is a high risk of drop in
spot aluminium price in case some unwinding of inventories takes place. At the
CMP, Nalco is trading at rich valuations of 16.9x FY2011E and 11.6x FY2012E
EV/EBITDA, as compared to peers Hindalco and Sterlite, which are trading in a
band of 5–7x FY2011E and FY2012E EV/EBITDA. We maintain Sell on the stock
with a Target Price of `319.
Result highlights
Nalco’s net sales increased by 2.8% yoy to `1,425cr mainly on account of
increased realisations. Alumina and aluminium production remained flat yoy at
399,000 and 112,000 respectively, while sales volumes declined by 9% yoy to
162,000 and 12% yoy to 104,000, respectively.
The aluminum segment’s sales increased by 1.5% yoy to `1,159cr, while the
chemicals segment’s revenue decreased by 3.5% yoy to `491cr and the electricity
segment’s revenue decreased by 28.5% yoy to `250cr in 3QFY2011.
The aluminium segment’s EBIT increased by 459.4% yoy to `348cr. However, the
company reported a loss of `127cr in its electricity segment at the EBIT level,
compared to a profit of `70cr in 3QFY2010, largely on account of an increase in
coal costs. Consequently, Nalco’s EBITDA increased by 31.6% yoy to `390cr and
net profit increased by 65.0% yoy to `256cr in 3QFY2011.
Concall – Key takeaways
During 3QFY2011, the cost of production for alumina stood at `11,700/tonne
(`10,131/tonne in 3QFY2010), while cost of production for aluminium stood
at `92,830/tonne (`96,278/tonne in 3QFY2010). The cost of power
production stood at `2.2/unit in 3QFY2011, compared to `2.04/unit in
3QFY2010.
The company sold 152,000 tonnes of alumina in the domestic market, while it
exported 12,000 tonnes of alumina in 3QFY2011. The company sold 80,000
tonnes of aluminium in the domestic market, while it exported 24,000 tonnes
of aluminium in 3QFY2011.
The company secured 85% of its thermal coal requirements through coal
linkage, while the balance was met via imports and e-auctions during
3QFY2011. The company purchases coal via linkage at `800/tonne.
Currently e-auction coal price is `2,600/tonne and imported coal is at
`4,000/tonne.
The company transfers power to its units at cost plus 15.5% on capital
employed for power business.
Management indicated that the 0.5mn tonne alumina expansion, which was
expected to come on stream by January 2011 will now come on stream by
April 2011.
Management informed that currently there are no plans for divestment in
Nalco.
Investment rationale
High cost of production remains a concern
Nalco’s 3QFY2011 cost of production for aluminium stood at ~US $2,060/tonne.
Given the high levels of backward integration for Nalco, we believe this cost of
production is very high. Current LME spot price of aluminium stands at
~US $2,500/tonne, while aluminium inventories remain at six-year high. Although
lot of these inventories are locked up in financing deals, and hence not available
for delivery, we believe unwinding of these inventories could result in a steep drop
in aluminium prices. A 20% fall in aluminum prices could result in zero profit from
the aluminum segment.
Coal supply issues to continue
Nalco has been facing coal supply issues, which have disrupted its operations in
the past. The company sources its annual coal requirement from Mahanadi
Coalfields Ltd., but the supply is not evenly distributed. In our view, any
disturbance in coal supply would increase the company’s dependence on imported
or external coal (which is very expensive compared to linkage coal), thereby
negatively affecting its margins.
Limited growth visibility
Apart from the ongoing expansion plan, we lack clarity on the other proposed
expansion plans as they are in various stages of financial closure and significant
progress is yet to be made.
Outlook and valuation
Although Nalco enjoys high levels of backward integration, the cost of production
remains very high for Nalco. Further, rising prices of imported coal are expected to
affect Nalco’s margins going forward. Given the high levels of inventories at LME
warehouses, we believe there is a high risk of drop in spot aluminium price in case
some unwinding of inventories takes place. At the CMP, Nalco is trading at rich
valuations of 16.9x FY2011E and 11.6x FY2012E EV/EBITDA, as compared to
peers Hindalco and Sterlite, which are trading in a band of 5–7x FY2011E and
FY2012E EV/EBITDA. We maintain Sell on the stock with a Target Price of `319.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Nalco – 3QFY2011 Result Update
Angel Broking maintains a Sell on Nalco with a Target Price of Rs. 319.
Nalco’s 3QFY2011 results were below our expectations. The company’s top line
grew by 2.8% yoy to `1,425cr (below our estimate of `1,673cr). Net profit grew
by 65.0% yoy to `256cr (below our estimate of `278cr). In light of rising cost of
production and rich valuations of the stock, we maintain Sell on the stock.
Mixed top-line segmental performance: Nalco’s net sales increased by 2.8% yoy
to `1,425cr mainly on account of increased realisations. The aluminum segment’s
sales increased by 1.5% yoy to `1,159cr during the quarter. However, the
chemicals and electricity segments reported 3.5% and 28.5% yoy decline in
revenue to `491cr and `250cr, respectively, in 3QFY2011.
Higher aluminum realisation leads to margin expansion: The aluminium
segment’s EBIT increased by 459.4% yoy to `348cr. However, the company
reported a loss of `127cr in its power segment at the EBIT level, compared to a
profit of `70cr in 3QFY2010. Consequently, Nalco’s EBITDA increased by 31.6%
yoy to `390cr and net profit increased by 65.0% yoy to `256cr in 3QFY2011.
Outlook and valuation: Although Nalco enjoys high levels of backward
integration, its aluminium cost of production remains very high. Given the high
levels of inventories at LME warehouses, we believe there is a high risk of drop in
spot aluminium price in case some unwinding of inventories takes place. At the
CMP, Nalco is trading at rich valuations of 16.9x FY2011E and 11.6x FY2012E
EV/EBITDA, as compared to peers Hindalco and Sterlite, which are trading in a
band of 5–7x FY2011E and FY2012E EV/EBITDA. We maintain Sell on the stock
with a Target Price of `319.
Result highlights
Nalco’s net sales increased by 2.8% yoy to `1,425cr mainly on account of
increased realisations. Alumina and aluminium production remained flat yoy at
399,000 and 112,000 respectively, while sales volumes declined by 9% yoy to
162,000 and 12% yoy to 104,000, respectively.
The aluminum segment’s sales increased by 1.5% yoy to `1,159cr, while the
chemicals segment’s revenue decreased by 3.5% yoy to `491cr and the electricity
segment’s revenue decreased by 28.5% yoy to `250cr in 3QFY2011.
The aluminium segment’s EBIT increased by 459.4% yoy to `348cr. However, the
company reported a loss of `127cr in its electricity segment at the EBIT level,
compared to a profit of `70cr in 3QFY2010, largely on account of an increase in
coal costs. Consequently, Nalco’s EBITDA increased by 31.6% yoy to `390cr and
net profit increased by 65.0% yoy to `256cr in 3QFY2011.
Concall – Key takeaways
During 3QFY2011, the cost of production for alumina stood at `11,700/tonne
(`10,131/tonne in 3QFY2010), while cost of production for aluminium stood
at `92,830/tonne (`96,278/tonne in 3QFY2010). The cost of power
production stood at `2.2/unit in 3QFY2011, compared to `2.04/unit in
3QFY2010.
The company sold 152,000 tonnes of alumina in the domestic market, while it
exported 12,000 tonnes of alumina in 3QFY2011. The company sold 80,000
tonnes of aluminium in the domestic market, while it exported 24,000 tonnes
of aluminium in 3QFY2011.
The company secured 85% of its thermal coal requirements through coal
linkage, while the balance was met via imports and e-auctions during
3QFY2011. The company purchases coal via linkage at `800/tonne.
Currently e-auction coal price is `2,600/tonne and imported coal is at
`4,000/tonne.
The company transfers power to its units at cost plus 15.5% on capital
employed for power business.
Management indicated that the 0.5mn tonne alumina expansion, which was
expected to come on stream by January 2011 will now come on stream by
April 2011.
Management informed that currently there are no plans for divestment in
Nalco.
Investment rationale
High cost of production remains a concern
Nalco’s 3QFY2011 cost of production for aluminium stood at ~US $2,060/tonne.
Given the high levels of backward integration for Nalco, we believe this cost of
production is very high. Current LME spot price of aluminium stands at
~US $2,500/tonne, while aluminium inventories remain at six-year high. Although
lot of these inventories are locked up in financing deals, and hence not available
for delivery, we believe unwinding of these inventories could result in a steep drop
in aluminium prices. A 20% fall in aluminum prices could result in zero profit from
the aluminum segment.
Coal supply issues to continue
Nalco has been facing coal supply issues, which have disrupted its operations in
the past. The company sources its annual coal requirement from Mahanadi
Coalfields Ltd., but the supply is not evenly distributed. In our view, any
disturbance in coal supply would increase the company’s dependence on imported
or external coal (which is very expensive compared to linkage coal), thereby
negatively affecting its margins.
Limited growth visibility
Apart from the ongoing expansion plan, we lack clarity on the other proposed
expansion plans as they are in various stages of financial closure and significant
progress is yet to be made.
Outlook and valuation
Although Nalco enjoys high levels of backward integration, the cost of production
remains very high for Nalco. Further, rising prices of imported coal are expected to
affect Nalco’s margins going forward. Given the high levels of inventories at LME
warehouses, we believe there is a high risk of drop in spot aluminium price in case
some unwinding of inventories takes place. At the CMP, Nalco is trading at rich
valuations of 16.9x FY2011E and 11.6x FY2012E EV/EBITDA, as compared to
peers Hindalco and Sterlite, which are trading in a band of 5–7x FY2011E and
FY2012E EV/EBITDA. We maintain Sell on the stock with a Target Price of `319.
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