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Alumina volumes to surge in FY13E
NALCO commissioned a 0.52mtpa alumina refinery in Q2 FY12, raising
its alumina capacity to 2.1mtpa. The company produced ~30,000-
40,000tons of alumina during Q2 FY12, which is expected to increase
to 0.12mn tons in H2 FY12. We expect alumina production to increase
from 1.6mn tons in FY11 to 1.7mn tons in FY12 and 1.9mn tons in
FY13. On the other hand, we expect aluminium production volumes to
remain flat over the next two years due to high coal costs and
lucrative alumina market. As a result of this, external sale of alumina
is expected to surge to 1mn tons in FY13 from 0.7mn tons in FY11.
Operating profit to remain flat over FY11-13E
Over the last two years, NALCO’s OPM has been impacted by rising
coal and raw material costs. We expect this to continue in FY12 and
expect the company’s OPM to shrink 456bps to 20.6%. However, in
FY13, we expect raw material contract prices to be lower as spot prices
of these raw materials have declined over the last six months. NALCO’s
power costs have jumped as supply of linkage coal from Coal India has
reduced to sub-80% levels (90% earlier) and price hikes announced in
Q4 FY11. We expect supply to decline further on account of the tight
domestic coal market. On the other hand, the pressure on margins
would be reduced due to higher share of alumina sales (revenue share
from 17% in FY11 to 28% in FY13). We estimate operating profit in
FY13 to increase 11.8% yoy to Rs15.5bn on the back of lower raw
material costs and higher alumina exports.
Risk reward favorable; upgrade to BUY
NALCO’s stock price has halved over the last six months on account of
depressed Q2 FY12 results and weak commodity prices We believe the
company has formed a bottom in terms of profitability in Q2 FY12 and
the worst is behind us. We expect margins to improve from Q2 FY12
levels on the back of improved coal supply and higher sales of alumina
in the export market. We expect OPM to improve drastically from the
9.5% reported in Q2 FY12 to 21.1% in FY13. With no major capex
over the next two years, we estimate cash levels to increase from the
current Rs56bn to Rs70bn by FY13. Our FY13 cash levels account for
54% of the current market cap and would lend support to the stock
price. At the CMP of Rs51, the company is trading at 5.2x FY12
EV/EBIDTA and 4x FY13 EV/EBIDTA which is at ~50% discount to its
historic one year forward average multiple of 10.5x. We do not see
much downside from the current levels and upgrade the stock from
Market Performer to BUY with a 9-month price target of Rs60.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Alumina volumes to surge in FY13E
NALCO commissioned a 0.52mtpa alumina refinery in Q2 FY12, raising
its alumina capacity to 2.1mtpa. The company produced ~30,000-
40,000tons of alumina during Q2 FY12, which is expected to increase
to 0.12mn tons in H2 FY12. We expect alumina production to increase
from 1.6mn tons in FY11 to 1.7mn tons in FY12 and 1.9mn tons in
FY13. On the other hand, we expect aluminium production volumes to
remain flat over the next two years due to high coal costs and
lucrative alumina market. As a result of this, external sale of alumina
is expected to surge to 1mn tons in FY13 from 0.7mn tons in FY11.
Operating profit to remain flat over FY11-13E
Over the last two years, NALCO’s OPM has been impacted by rising
coal and raw material costs. We expect this to continue in FY12 and
expect the company’s OPM to shrink 456bps to 20.6%. However, in
FY13, we expect raw material contract prices to be lower as spot prices
of these raw materials have declined over the last six months. NALCO’s
power costs have jumped as supply of linkage coal from Coal India has
reduced to sub-80% levels (90% earlier) and price hikes announced in
Q4 FY11. We expect supply to decline further on account of the tight
domestic coal market. On the other hand, the pressure on margins
would be reduced due to higher share of alumina sales (revenue share
from 17% in FY11 to 28% in FY13). We estimate operating profit in
FY13 to increase 11.8% yoy to Rs15.5bn on the back of lower raw
material costs and higher alumina exports.
Risk reward favorable; upgrade to BUY
NALCO’s stock price has halved over the last six months on account of
depressed Q2 FY12 results and weak commodity prices We believe the
company has formed a bottom in terms of profitability in Q2 FY12 and
the worst is behind us. We expect margins to improve from Q2 FY12
levels on the back of improved coal supply and higher sales of alumina
in the export market. We expect OPM to improve drastically from the
9.5% reported in Q2 FY12 to 21.1% in FY13. With no major capex
over the next two years, we estimate cash levels to increase from the
current Rs56bn to Rs70bn by FY13. Our FY13 cash levels account for
54% of the current market cap and would lend support to the stock
price. At the CMP of Rs51, the company is trading at 5.2x FY12
EV/EBIDTA and 4x FY13 EV/EBIDTA which is at ~50% discount to its
historic one year forward average multiple of 10.5x. We do not see
much downside from the current levels and upgrade the stock from
Market Performer to BUY with a 9-month price target of Rs60.
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