National Aluminium Co. -Next trigger – Expand, diversify or restructure ::Emkay

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National Aluminium Co. Ltd.

Next trigger – Expand, diversify or restructure

We met the Senior Management team (Corporate Office - Bhubhaneshwar) and visited their Smelting & Captive power generation facilities (Angul - Orissa).

Key takeaways

¡                 A Navratna PSU earlier leader in the domestic Aluminium space now at third position with Hindalco and Vedanta expanding significantly.

¡                 To avoid exposure to a single commodity (Aluminium) it would diversify to other businesses. Power vertical being created, 200 acres for an “Aluminium park” in Orissa taken. Also exploring options in uranium and copper.

¡                 Nalco has 1200 MW (10 units of 120 MW each) power plants. Coal requirement is met largely through linkages; while shortfall (about 5-10%) is being sourced through e-auction. Linkage for two additional coal blocks is under development and would be operational by Dec 2012. This would give 2 million tonne of coal reducing coal cost from Rs 2600 per tonne to about Rs 800 per tonne. Impact to be seen starting late FY 13.

¡                 Smelter up gradation on for taking pots operational from 180 KA to 220 KA. This would progressively increase their Aluminium production capacity from 4.6 lakh tpa to 5.6 lakh tpa over the next 4-5 years.

Valuation

At the CMP of Rs 66 the stock is trading at 15.9xFY11 earnings and 8.4x FY11 EV/ EBITDA. The next big trigger for operational growth would be seen 3-4 years down the line when the coal linkages are in place, mining and smelting capacities enhanced. Any restructuring in the balance sheet or further expansion announcement can bring about a quick trigger.