National Aluminium Co Ltd :High-grade large bauxite reserves, cash at 58% of mcap and at 0.7x P/BV: Too much pessimism being built in, in our view: JPMorgan

For investors with a slightly longer investment horizon, we believe NALCO offers
an attractive risk-reward play. A strong balance sheet (net cash at 58% of mcap
and increasing), large high-grade bauxite reserves (8th-largest globally), and stillcompetitive
alumina cost position (we estimate alumina CoP at ~$270/T even at
current multi-year high caustic soda prices) offer investors the possibility of
benefiting from any rebound in LME aluminum prices at attractive valuations.
 The under lying asset base has not declined in sync with the stock price and
LME aluminum price: Aluminum fundamentals are not strong, in our view,
and at $1900/T a significant part of global capacity would be loss-making (even
NALCO’s aluminum capacity at a full cost basis would be loss-making).
NALCO’s stock price is down ~32% YTD, one of the worst performers in
metals globally; we believe this is due to LME aluminum weakness, and the
weakness in Indian markets. NALCO still has access to some of the best bauxite
resources in the world. The alumina business remains highly profitable (we
estimate EBITDA margins to be 15-20% at current spot/linkage Alumina
prices) even now. The company’s asset base includes 2.3MT of alumina
capacity, 0.46MT of aluminum capacity, and a 1200MW power plant. We
estimate that the current EV/replacement value for NALCO stands at 0.2x (not
accounting for bauxite reserves).
 Aluminum - Not profitable at current prices, but LME prices are at
cyclical lows: On a full cost basis, admittedly NALCO’s aluminum operations
would not be making a profit. NALCO’s aluminum segment has been lossmaking
at the PBIT level for the last six quarters on a full cost basis (alumina
on a transfer price basis). We would highlight that, on an integrated basis,
NALCO should be profitable at current alumina and aluminum prices (we
forecast EPS of Rs3.2 in FY14). The production problems appear to be over,
with coal supplies stabilizing. On the variable cost front, other than caustic soda
prices, raw material costs are stable or declining. NALCO’s ability to export
alumina also allows the company to benefit from Rupee weakness. We would
highlight that current aluminum prices are at cyclical lows given that a relatively
decent share of global capacity is likely loss-making.
 Should one give any value to cash? Yes, at least book value: Investors we
have spoken to are not keen on giving any credit to the large (and increasing)
cash balance at the state-owned miners. In our view, cash should be at least
valued at book value (and hence we use EV/EBITDA). Key downside risks
include a sharp decline in alumina prices from the current level.

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