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National Aluminium Co (300)
Metals & Mining
Another miss. Nalco’s 3QFY11 EBITDA of Rs4.1 bn (+25%) and net income of Rs2.56
bn (+65%) was 32% and 35% lower than our estimate. Commissioning of new
alumina refinery has been delayed further by 3 months reflecting weak execution. We
increase our earnings estimates by 7.6% and 1.8% for FY2012E and FY2013E on the
back of our recent revision in aluminium price forecast. We raise our 12-month target
price to Rs300 (Rs285 earlier) but maintain our SELL rating on expensive valuations.
Results substantially lower than our estimate
Nalco’s 3QFY11 revenue of Rs14.4 bn (+25.4% yoy) was 14% lower than our estimate; primarily
on lower metal deliveries. EBITDA of Rs3.7 bn (+109.3% yoy) was 33% below our estimate on
higher-than-expected cost of production (10% above our estimates) emanating from higher-thanexpected
raw material and other cost items. Power and fuel cost declined 11% sequentially and
flat yoy on better sourcing strategy and lower moisture content in coal. Employee cost continues
to run ahead of our estimate and increased 12% yoy to Rs2.3 bn. Other expenditure increased by
a steep 25% yoy to Rs2.6 bn, presumably on account of forex losses. The company achieved metal
aluminium production of 110K tons in 3QFY11, down 4% yoy and flat qoq.
Nalco hopeful of reducing COP
Nalco in our recent meeting indicated that it is confident of reducing COP through reduction in
alumina cost of production to less than Rs10,000/ton from Rs11,500/ton currently. Cost reduction
would be on the back of savings in R&M costs (which was extremely high in 2010) and better
absorption of overheads with enhanced capacity in FY2012E. The company is also confident of
reducing aluminium cost of production on the back of consistent sourcing of coal for its power
plant. Note that Nalco gets about 85% of coal requirements from linkage; for the balance forward
e-auctions to obtain coal and imports is used. We highlight that Nalco attempted to run
aluminium pots at lower amperage (160kA); this resulted in damage of pots and higher cost of
production. The company believes this situation is unlikely to recur in FY2012E.
Stock trading at expensive valuations, maintain SELL rating
We align our estimates with our revised aluminium price forecast which increased by 4.6% and
2% to US$2,250/ton and US$2,300/ton for FY2012E and FY2013E, respectively. As a result, we
increase our earnings estimate for FY2012E and FY2013E to Rs20.5, and Rs24.7 from Rs19.1 and
Rs24.3 earlier. Nalco is trading at an extremely expensive valuation of 10.3X FY2012E and 8.2X
FY2013E EBITDA and 19.6X FY2012E and 16.3X FY2013E earnings. We revise our FY2012E target
price to Rs300/share from Rs285 earlier but maintain SELL rating on expensive valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
National Aluminium Co (300)
Metals & Mining
Another miss. Nalco’s 3QFY11 EBITDA of Rs4.1 bn (+25%) and net income of Rs2.56
bn (+65%) was 32% and 35% lower than our estimate. Commissioning of new
alumina refinery has been delayed further by 3 months reflecting weak execution. We
increase our earnings estimates by 7.6% and 1.8% for FY2012E and FY2013E on the
back of our recent revision in aluminium price forecast. We raise our 12-month target
price to Rs300 (Rs285 earlier) but maintain our SELL rating on expensive valuations.
Results substantially lower than our estimate
Nalco’s 3QFY11 revenue of Rs14.4 bn (+25.4% yoy) was 14% lower than our estimate; primarily
on lower metal deliveries. EBITDA of Rs3.7 bn (+109.3% yoy) was 33% below our estimate on
higher-than-expected cost of production (10% above our estimates) emanating from higher-thanexpected
raw material and other cost items. Power and fuel cost declined 11% sequentially and
flat yoy on better sourcing strategy and lower moisture content in coal. Employee cost continues
to run ahead of our estimate and increased 12% yoy to Rs2.3 bn. Other expenditure increased by
a steep 25% yoy to Rs2.6 bn, presumably on account of forex losses. The company achieved metal
aluminium production of 110K tons in 3QFY11, down 4% yoy and flat qoq.
Nalco hopeful of reducing COP
Nalco in our recent meeting indicated that it is confident of reducing COP through reduction in
alumina cost of production to less than Rs10,000/ton from Rs11,500/ton currently. Cost reduction
would be on the back of savings in R&M costs (which was extremely high in 2010) and better
absorption of overheads with enhanced capacity in FY2012E. The company is also confident of
reducing aluminium cost of production on the back of consistent sourcing of coal for its power
plant. Note that Nalco gets about 85% of coal requirements from linkage; for the balance forward
e-auctions to obtain coal and imports is used. We highlight that Nalco attempted to run
aluminium pots at lower amperage (160kA); this resulted in damage of pots and higher cost of
production. The company believes this situation is unlikely to recur in FY2012E.
Stock trading at expensive valuations, maintain SELL rating
We align our estimates with our revised aluminium price forecast which increased by 4.6% and
2% to US$2,250/ton and US$2,300/ton for FY2012E and FY2013E, respectively. As a result, we
increase our earnings estimate for FY2012E and FY2013E to Rs20.5, and Rs24.7 from Rs19.1 and
Rs24.3 earlier. Nalco is trading at an extremely expensive valuation of 10.3X FY2012E and 8.2X
FY2013E EBITDA and 19.6X FY2012E and 16.3X FY2013E earnings. We revise our FY2012E target
price to Rs300/share from Rs285 earlier but maintain SELL rating on expensive valuations.
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