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.

National Aluminium Company - Waiting for sunshine; company update; Reduce: Edel

National Aluminium Company (NACL IN, INR 54, Reduce)

Key takeaways from NALCO’s Q1FY13 earnings concall are: (a) Q1FY13 production hit due to rains as well as shortage of linkage coal. While loss in alumina production can be made up in the dry season, aluminium volumes to remain subdued till LME prices recover substantially; (b) low LME and high raw material cost impacted margins, partially offset by high premiums and INR depreciation; and (c) FY13 capex guidance maintained at INR23bn. With no positive triggers in the near term and expensive valuation, we maintain ‘REDUCE’.

Research reports- Tata Power, PFC, NALCO :Kotak Sec PDF link

Sizzling Stock - Nalco, REC ::Business Line

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Sizzling Stock - Nalco (Rs 61)

After finding ground at around Rs 53, National Aluminium Company Ltd (Nalco) jumped more than 11 per cent with good volumes in the previous week. This rally has breached the stock's immediate resistance at Rs 59 as well as its 21 and 50-day moving averages. However, the stock is currently testing its 200-day moving average at Rs 63.

The daily relative strength index is on the brink of entering the bullish zone from the neutral region and the weekly RSI is inching higher in the neutral region.

Both daily and weekly price rate of change indicators are featuring in the positive terrain implying buying interest. Strong up move above Rs 63 will push the stock higher to Rs 67 and then to Rs 71 in the short-term.

Only an emphatic rally above Rs 71 will reinforce the stock's medium-term uptrend which started from December 2011 trough of Rs 48.5. Subsequent medium-term targets will be Rs 77 and Rs 81.

Nevertheless, inability to surpass Rs 67 can pull the counter down to Rs 57 and to Rs 54 in the short-term. Significant long-term support is pegged between Rs 48 and Rs 50.

NALCO – BUY ‘Risk Reward Favorable’:: IIFL

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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.

National Aluminium Co.: Earnings miss on spike in power costs ::Kotak Securities

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National Aluminium Co. (NACL)
Metals & Mining
Earnings miss on spike in power costs. Nalco’s 2QFY12 EBITDA of Rs1.5 bn was
50.3% below our estimate on an increase in raw material costs and higher-thanexpected
power and fuel cost. The aluminium segment reported PBIT loss of Rs0.9 bn.
Profit of chemical and electricity segment declined. We align Nalco’s earnings estimate
with our revised aluminium price forecast and accordingly lower our FY2012-14E
earnings estimates by 7%% and 21%, respectively. We maintain our SELL rating with a
revised target price of Rs55/share.

National Aluminium (Nalco) : 2QFY2012 Result Update: Angel Broking,

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National Aluminium’s (Nalco) 2QFY2012 profitability was significantly below our
expectations on account of higher-than-expected raw-material and power and
fuel costs. We have a Neutral view on the stock.
Higher realization leads to net sales growth: For 2QFY2012, Nalco’s net sales
grew by 8.9% yoy to `1,584cr mainly due to increased realization, despite lower
volumes. Realization of alumina and aluminium grew by 29.4% and 23.1% yoy to
US$400 and US$2,599, respectively. However, the company lost production of
atleast 6,000 tonnes of aluminium metal on account of coal supply disruptions by
Mahanadi Coalfields.
Lower domestic coal supplies hit margins: Raw-material cost as a percentage of
net sales stood at 18.7% in 2QFY2012 compared to 15.5% in 2QFY2011.
Further, power and fuel cost as a percentage of net sales stood at 40.3% in
2QFY2012 compared to 34.1% in 2QFY2011. The company had to import coal
on account of lower supplies from Mahanadi Coalfields, which resulted in higher
power costs. Hence, EBITDA decreased by 56.1% yoy to `153cr and EBITDA
margin contracted by massive 1,427bp yoy to 9.6%. Other income grew by
54.7% yoy to `132cr and tax rate stood at 16.4% in 2QFY2012 compared to
33.7% in 2QFY2011. Consequently, net profit decreased by 37.8% yoy to `139cr
(significantly below our estimate of `268cr).
Outlook and valuation: Although Nalco enjoys high levels of backward
integration, the cost of production remains very high for Nalco. Further, there is
lack of clarity over Nalco’s volume growth. At the CMP, Nalco is trading at
valuations of 7.4x FY2012E and 4.5x FY2013E EV/EBITDA, higher than its peers.
Hence, we recommend Neutral on the stock.

Coal burns profit as well for NALCO : Nirmal Bang

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Coal burns profit as well
NALCO reported dismal 2QFY12 performance, as its EBITDA was 60%/65%
below our/consensus estimates and PAT was 48%/55% below our/consensus
estimates, respectively. This was primarily attributed to coal shortage, which
resulted in production loss as well as higher power costs because of the
usage of grid power. The company commissioned 525,000 tonne alumina
refinery in 2QFY12 and this will improve alumina volume in the coming
quarters. However, despite higher alumina volume, we expect the company’s
financial performance to remain subdued because of higher energy costs
and lower aluminium prices. We currently do not have any rating on the
stock.
Financial performance: NALCO posted 56% YoY and 71% QoQ drop in EBITDA
because of higher energy costs, while PAT declined 38% YoY and 63% QoQ. The
significant erosion in EBITDA was marginally cushioned at the PAT level due to
higher other income and lower tax rate.
Increase in costs across the board: NALCO witnessed 33% QoQ increase in
power and fuel costs, despite lower aluminium production sequentially. This is
largely attributed to lower usage of linkage coal because of heavy rains in the
eastern parts of the country and also usage of grid power. Although, we expect
some moderation in blended coal costs, a part of the increase in costs is
permanent in nature. The company also witnessed a 22% increase in other
expenditure associated with re-starting of aluminium pots that were impacted due
to power shortage.
Expansion projects: The company commissioned 525,000 tonne alumina refinery
in 2QFY12 and we expect the incremental volume to reflect from 3QFY12
onwards.
Cash position: The company is currently sitting on cash surplus of Rs56bn (36%
of current market cap) compared to Rs51bn at the end of March 2011.

Nalco : TP: INR77 Neutral :Motilal Oswal

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Alumina refinery expansion to drive RoCE
Upgrade to Neutral
 Rise in cost of production depresses return ratios.
 Over FY07-11 Nalco delivered ASR of only 3% despite average RoIC of 43%.
Consistently declining RoIC and IC/CE ratio dragged down RoCE.
 Nalco's alumina refinery expansion will drive RoIC and RoCE.
 We upgrade the stock to Neutral.
Rise in cost of production depresses return ratios
Over FY07-11, Nalco's cost of production (CoP) increased almost 75% to ~USD2,100/
ton due to rising operating costs. There has been huge cost inflation due to unavailability
of cheaper linkage coal from Coal India, rising maintenance costs due to aging smelters,
faster labor cost inflation than productivity improvement and rising commodity prices.
Nalco gets 70-80% of its allotted coal from Coal India and it procures the rest either
from e-auctions or imports, which raises costs. Per ton cost of coal used for its captive
power plant increased from USD13 in FY07 to USD30 in FY11. Employee cost per
ton of aluminum produced has doubled from USD242 in FY07 to USD484 in FY11.
Consequently, return ratios declined over FY07-11. RoIC peaked in FY07 at 82% and
fell sharply to 23% in FY11. RoE declined from 31% to 10% in FY11. RoCE declined
from 49% in FY07 to 13% in FY11 due to higher operating costs and lower LME
(aluminum declined from ~USD2,600 to USD2,200 in FY11).


Benefits of phase II expansion will drive earnings growth
Nalco invested ~USD1.1b over FY07-11 to increase smelter capacity from 345ktpa
to 460ktpa, boost captive power capacity from 960MW to 1,200MW and increase
alumina capacity from 1.6mtpa to 2.1mtpa under its phase II expansion. The balance
sheet has remained debt free with a cash surplus of USD1.1b. Commissioning of an
alumina refinery is behind schedule but Nalco expects to complete it in FY12. As
production of alumina increases, sales volumes will grow, driving revenue growth


Rising UnIC/CWIP
Nalco's UnIC/CWIP will increase from 35% in FY11 to 54% in FY13 due to an increasing
cash component and lower capex in the core business. Although Nalco is working on
several expansion projects in Indonesia and Orissa, on nuclear power and titanium, there
is little visibility of any of them being completed. Nalco's intention to get into unrelated
projects (even though through a JV partner) is worrisome.
RoIC, RoCE improve; Valuations attractive; upgrade to Neutral
Nalco will post earnings CAGR of 17% over FY11-13 due to strong growth in alumina
volumes and stronger alumina prices. Over the next two years, Nalco will generate USD1b
cash flow from operations and capex will be a mere USD100m. However valuations have
become attractive after the recent correction in stock price. Nalco will also benefit from a
depreciating rupee as it exports excess alumina and the alumina refinery expansion will
drive RoIC and RoCE. At CMP of INR 62, the stock trades at a 56% discount to NAV
and EV of 3.4x FY13E EBITDA. Risk remains from coal supply disruptions from Mahanadi
coalfield. We upgrade the stock to Neutral with a target price of INR77 based on 5x
FY13E EV/EBITDA.

sector report and other companies

Metals and Mining, RoIC v/s RoCE: The Return Roulette :: Motilal Oswal

Nalco --Upgrading to Neutral  Changes to forecasts: Macquarie Research,

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Nalco
Upgrading to Neutral
Event
 Changes to forecasts: Our global commodities team has increased its
assumption on aluminium prices as it believes that the overhang of an interest
rate increase and liquidation of inventory is now slightly lower. We are
upgrading Nalco to Neutral from Underperform and maintain TP at Rs72.
Impact
 Increasing aluminium and alumina price forecasts: Our global commodity
team has increased its aluminium price forecasts for FY12 by 1% to
US$2,572/t and for FY13 by 10% to $2,662/t. We have also increased our
alumina price forecasts for FY12/13/14 by 2%, 13% and 3%, respectively, to
$384, $383 and $385/t.
 Global currency forecasts: Our economic team has also changed USD/INR
forecast for FY12 from 44.3 to 46.3, FY13 from 43.2 to 45.8, and FY14 from
41.8 to 44.2. These changes have also been built into our revised
assumptions.
 Changing estimates: We raise our earnings estimates for Nalco to reflect
upgrades to aluminium price assumptions and changes in our currency
estimates. However, the company continues to face problems in sourcing coal
for its CPP and has recently shut 60 of its pots due to unavailability of coal.
These issues will continue to be an overhang, in our view.
 Profitability depends heavily on coal mines: Though Nalco’s expansion
plans are now on stream, it is yet to start development of its Utkal coal mine
and expects coal from this mine to be available in the next two years. Given
constraints on supply from Coal India, margins can come under pressure in
the absence of captive coal.
Earnings and target price revision
 We have raised our EPS estimates for FY3/12/13/14 by 12%, 35% and 11%,
respectively.
Price catalyst
 12-month price target: Rs72.00 based on a Price to Book methodology.
 Catalyst: Resolution of coal problems
Action and recommendation
 Upgrade to Neutral: The stock has corrected very sharply (44% from the
peak) in the past few months due to worries on coal availability. However, this
correction has placed the assets in fair value zone. While we expect Nalco’s
stock to recover, we continue to see limited upside. We would recommend
Hindalco (HNDL IN, Rs147, OP, TP: Rs259), which in our view has a better
hedge for its earnings as well as a better growth profile, with access to raw
materials.

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.

National Aluminium – 1QFY12: Lower costs fuel EBITDA ::RBS

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National Aluminium reported 1QFY12 EBITDA of Rs5.0bn (+33% yoy and +20% qoq), higher
than our estimate of Rs4.1bn, due to lower-than-expected costs. We have a Hold on the stock
with TP of Rs91.


Lower costs drive earnings
􀀟 National Aluminium 1QFY12 net revenues were Rs17.3bn (+34% yoy and -3% qoq). This was
driven by both higher LME as well as higher alumina sales volumes. Average aluminium
realization increased 22% yoy to US$2,750/t. Alumina sales volumes were at 168kt (+68%

yoy and flat qoq) while aluminium sales volumes were at 110kt (+1% yoy and -7% qoq).
Alumina production was 400kt (+2% yoy and -4% qoq) while aluminium production was
110.8kt (-1% qoq and yoy).
􀀟 RM costs at Rs1.8bn declined 47% qoq. Power and fuel costs at Rs4.8bn (+30% yoy and
+2% qoq) were lower than expected considering the sharp price hike of Mahanadi coal fields
linkage price. Staff costs were in-line with expectations at Rs3.4bn (+55% yoy and flat qoq).
The lower expenses drove EBITDA to Rs5.0bn (+33% yoy and +20% qoq), 21% higher
versus our estimate of Rs4.1bn.
􀀟 Other income was higher than expected at Rs1.26bn, up 30% qoq. Depreciation expense
surprisingly declined sharply by 23% qoq to Rs1.01bn. This drove PAT to Rs3.76bn (+33%
yoy and +23% qoq).
􀀟 Nalco is currently trading at 10.6x/9.6x FY12/13F earnings and 4.9x/4.1x FY12/13F on an
EV/EBITDA basis. We have a Hold rating on the stock with TP of Rs91.

National Aluminium – 1QFY12: Lower costs fuel EBITDA ::RBS

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National Aluminium reported 1QFY12 EBITDA of Rs5.0bn (+33% yoy and +20% qoq), higher
than our estimate of Rs4.1bn, due to lower-than-expected costs. We have a Hold on the stock
with TP of Rs91.


Lower costs drive earnings
􀀟 National Aluminium 1QFY12 net revenues were Rs17.3bn (+34% yoy and -3% qoq). This was
driven by both higher LME as well as higher alumina sales volumes. Average aluminium
realization increased 22% yoy to US$2,750/t. Alumina sales volumes were at 168kt (+68%

yoy and flat qoq) while aluminium sales volumes were at 110kt (+1% yoy and -7% qoq).
Alumina production was 400kt (+2% yoy and -4% qoq) while aluminium production was
110.8kt (-1% qoq and yoy).
􀀟 RM costs at Rs1.8bn declined 47% qoq. Power and fuel costs at Rs4.8bn (+30% yoy and
+2% qoq) were lower than expected considering the sharp price hike of Mahanadi coal fields
linkage price. Staff costs were in-line with expectations at Rs3.4bn (+55% yoy and flat qoq).
The lower expenses drove EBITDA to Rs5.0bn (+33% yoy and +20% qoq), 21% higher
versus our estimate of Rs4.1bn.
􀀟 Other income was higher than expected at Rs1.26bn, up 30% qoq. Depreciation expense
surprisingly declined sharply by 23% qoq to Rs1.01bn. This drove PAT to Rs3.76bn (+33%
yoy and +23% qoq).
􀀟 Nalco is currently trading at 10.6x/9.6x FY12/13F earnings and 4.9x/4.1x FY12/13F on an
EV/EBITDA basis. We have a Hold rating on the stock with TP of Rs91.

National Aluminium Co:: Above expectations: Higher contribution from alumina ::Goldman Sachs,

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National Aluminium Company (NALU.BO)
Neutral  Equity Research
Above expectations: Higher contribution from alumina
What surprised us
NALCO reported 1QFY12 net income of Rs3,768 mn (+33%yoy, +23% qoq),
14% above GS and 16% above Bloomberg consensus estimates. For the
quarter, revenue came in at 17,331mn (+34% yoy, -3% qoq), which was
largely in line with our estimates. At the operating level, EBITDA came in
at Rs5,298 mn (+17% qoq), implying margin expansion of about 519bp,
primarily driven by higher contribution from the alumina business. The
company reported alumina sales of 183 kT (vs. 99kT in 1QFY11) and
average realisations of US$418/ton (vs. US$353/ton in 1QFY11), higher
than our estimate of US$380/ton, driving a 9% higher-than-expected
EBITDA. Coal supplies from Coal India were regular and did not
necessitate use of any imported coal during the quarter, keeping the
power and fuel costs in check. Higher other income – due to enhanced
treasury yields and higher surplus funds – led to a 14% positive surprise at
the net profit level.
What to do with the stock
We fine-tune our FY12E-FY14E EPS by 1%-2% on account of higher
alumina realisations. At 1.3X FY12E P/B with 12.3% FY12E ROE, the stock
appears reasonably valued. We maintain our Neutral rating and our 12-
month P/B-based target price of Rs87. Risks: Upside – higher aluminium
and alumina prices; downside – news flow on potential divestment of
stake by Government of India.

National Aluminium Co - Value play:: Standard Chartered Research,

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 We upgrade Nalco to Outperform from Underperform
and raise price target to Rs73 from Rs67.
 The stock is trading at five-year low valuations with
EV/EBITDA and PE at 2008 levels.
 Catalyst: commissioning of the new alumina refinery,
which will enable Nalco to sell ~1.2m tonnes of smelter
grade alumina, giving it higher EBITDA than for
aluminium.
 We raise FY13E EPS estimate by 6.7% to Rs6.5. We
are also introducing FY14 estimates


Play on alumina. After the commissioning of the new
refinery in Damanjodi, Nalco would have around 1.2m
tonnes of surplus alumina. Our analysis of the global
alumina market indicates that there is likely to be
shortage/tightness in supply in the next 3-4 years provided
aluminium demand keeps growing at around 4-5%.
Aluminium price has strong cost-push support – We
expect rising energy costs and alumina prices to support
aluminium prices. Our global resources team is bullish on
coal – we estimate thermal coal could rise to US$150/tonne
going forward. In a scenario of rising coal and oil prices,
there will be cost-push support for aluminium. We assume a
spot price of US$2,500/ tonne in our forecasts.
Nalco’s production costs to increase – Non-availability of
linkage coal/delay in coal block development and rising
carbon and caustic soda prices could dilute the profitability
of the company, in our view.
Cash needs to be valued at a premium to book value –
Rs20bn of Nalco’s cash needs to be valued at a premium to
book value. Nalco is using this cash to acquire 49% of the
Kapakhera nuclear power project. The equity IRR of the
project is likely to be ~15-16%, which is above investment
grade. However, we have valued cash at book value.
Valuation: Price target of Rs73 – We rate the stock
Outperform with a price target of Rs73. At our price target
Nalco would trade at 11x FY13E earnings. Upside to our
valuation could arise if the cash is valued at higher than
book value given attractive investment opportunities.
Risks. A 1% fall in aluminium prices will result in profitability
declining 2.5%.

India Aluminium - Time to pick value:: Standard Chartered Research,

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Time to pick value
 After steep corrections in the past three months Indian aluminium stocks are trading
near their adjusted book values. At the same time, adjusted for cash/capital work in
progress, their RoEs should remain around early-teens given high dependence on
alumina prices.
 We believe that aluminium has strong cost-driven downside support; at the same time,
even if aluminium demand grows at around 4-5%, alumina will still be in short supply.
 We upgrade Hindalco to Outperform from In-Line given its non-cyclical product mix (80-
85% of Novelis production) and rise in alumina sales once Utkal Alumina is
commissioned.
 We upgrade Nalco to Outoperform from Underperform given it is trading near book
value and its earnings are likely to be relatively stable because of the high dependence
on alumina sales.


Indian aluminium stocks, particularly Nalco and Hindalco, have recently corrected sharply,
impacted by lower aluminium prices and high valuations. Though the stocks are near historical
lows, industry fundamentals are better off.
 Aluminium prices have strong downside support at around US$2,300-2,400/tonne because of
rising energy prices.
 The global alumina market is likely to be finely balanced in the next few years. We expect
cost-push and relative scarcity of alumina to push up prices.
We upgrade Hindalco to Outperform from In-Line given its non-cyclical product mix (80-85% of
Novelis production) and rise in alumina sales once Utkal Alumina is commissioned. It is
undertaking the most aggressive expansion plan in its history – likely to result in significant
capacity addition from end-FY12 onwards. Hindalco is trading at 0.8x FY12E book, which we
believe is unjustified given the growth prospects beyond FY12.  
We upgrade Nalco to Outoperform from Underperform given it is trading near book value and its
earnings are likely to be relatively stable because of the high dependence on alumina sales. The
much awaited new alumina capacity is in the process of being commissioned and from FY13
Nalco would likely be able to sell 1-1.2m tonnes of alumina.


There is value
 After the steep correction in Indian aluminium stocks, value has emerged. We upgrade
Hindalco to Outperform from In-Line and Nalco to Outperform from Underperform.
 We raise Nalco’s FY13E EPS by 6.7% to Rs6.5 and also introduce FY14 estimates. A key
catalyst will be the commissioning of the new alumina smelter. We rate Nalco as Outperform
with a price target of Rs73/sh. Nalco is trading near its all-time low on price/book and
EV/EBITDA.


 We raise Hindalco’s FY12/13 EPS estimates by 7.1%/5.3% to Rs18.1 and Rs20.5. We also
introduce FY14 estimates. The stock’s catalysts: commissioning of the new aluminium smelter
at Mahan and clarity on commissioning date for Utkal Alumina. We value Hindalco at a
premium to Nalco (7x FY13E EV/EBITDA compared to 6x for Nalco) given it has strong
growth drivers post FY13 – commissioning of its Aditya smelter and refinery. We estimate that
Hindalco standalone earnings could grow by more than 60% over FY13-15. We upgrade
Hindalco to Outperform with price target of Rs174/sh.


 We believe that the global alumina market will remain finely balanced for years to come.
Driven by cost-push and relative scarcity of alumina, prices are likely to rise in the next 2-3
years.
 Aluminium demand has remained relatively strong in the first seven months of CY11, growth
nearly 8%. Aluminium has big cost-push support from rising energy prices and a relatively
tight alumina market.

Nalco – Upgrade to Neutral from Sell on recent underperformance ::Goldman Sachs

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Nalco – Upgrade to Neutral from Sell on recent underperformance
What's changed
We upgrade Nalco to Neutral from Sell as the stock is now close to our
new 12-month P/B based target price of Rs87, yielding 6% potential
upside. Since we added it to our Sell list on January 21, 2009, Nalco has
risen 78% vs 108% for Sensex.
Earnings leveraged to alumina prices
We revise up our alumina price forecasts (up 5% for FY12E) due to
higher demand from Chinese smelters, driving higher contribution from
the alumina business. In addition, recent completion of the expansion
project will drive a 13% CAGR volume growth in alumina over FY11-13E.
Every 10% increase in alumina prices increases Nalco’s earnings by 6%.
We revise our FY12E-FY14E EPS estimates by up to 9% on higher
commodity price assumptions.  
Coal supply to power plant is a concern
Periodic disruption in coal supply to the captive power plant of Nalco,
driven by law and order related issues (actions by locals seeking
compensatory jobs from MCL, a subsidiary of Coal India) remains an
area of concern. This implies sustained higher power and fuel cost as
Nalco has to rely on higher-cost imports or power purchase from the
grid, to meet this shortfall.
Reasonable valuations
In our view, after its recent underperformance led by aluminium prices
and higher coal prices, the risk/reward for Nalco looks balanced relative
to its own trading history. At 1.6x FY12E P/B, in line with the global
average, with 12% ROE compared to global average of 20%. At 6.9X
EV/EBITDA, it is now trading about 8% below its mid-cycle of 7.5x.
We revise down our 12-month target price to Rs87 (from Rs91.25), based
on a lower target P/B multiple of 1.7x FY12E (from 1.9x on lower
earnings/returns), implying 6% potential upside. We upgrade the stock
to Neutral from Sell.
Key risks
Downside: weaker aluminium and alumina prices; Upside: newsflow on
potential divestment of stake by Government of India

National Aluminium (NALU.BO; –Takeaways from Citi India Investor Conference – Day 1

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National Aluminium (NALU.BO; Rs90.25; 3L)
 Takeaways from Mumbai — Nalco presented at the Citi India Investor
Conference in Mumbai. Below are the key takeaways.
 Expansion Plans — Nalco's alumina capacity expansion from 1.6mtpa to
2.1mtpa is likely to be completed in FY12. This would be enhanced further to
2.28mtpa via debottlenecking by March 2012 (capex Rs5bn). Nalco has plans to
increase alumina capacity by another 1mtpa (taking total to 3.3mtpa) by 2015 at
a capex of Rs30bn. The company plans to enhance smelter capacity at the
existing location (Angul) from 460kt to 567kt by the upgradation of the smelter
from 180KA to 220KA (capex Rs13.5bn) by 2018, together with two power plants
of 250MW each (capex Rs25.3bn). The company has greenfield expansion plans
in Indonesia – 500ktpa smelter + 1,250 MW; Orissa/Chhattisgarh – 500ktpa
smelter; Andhra Pradesh – bauxite + alumina refinery (1.4mtpa). The Indonesian
smelter will source alumina from the Andhra Pradesh refinery and the Orissa
smelter will use Nalco’s surplus alumina.
 Better fuel efficiency — Nalco hopes that its fuel efficiency improves in FY12
vis-a-vis FY11 on account of better quality coal being made available by Coal
India. Average fuel consumption in FY11 was 0.9kg/kwh of power and Nalco
expects this to decline to 0.87kg/kwh. Nalco expects the proportion of imported
and washed coal to decline from 10-12% in FY11.
 Cost of production — Nalco is a low cost alumina producer. It enjoys the
benefits of good quality bauxite, low-cost captive power, own railway wagons and
captive port facilities. The average cost of alumina prior to the coal price hike was
$220/t and for aluminium ~$1,850/t. The coal price hike would impact aluminium
cost of production by $80-90/t but Nalco believes that the increase should be
partly offset by likely improvement in coal consumption, higher alumina volumes,
and a lower proportion of imported coal. They have been allotted a coal block
with 70 mt of reserves and are hoping for coal flowing in from there before 2012-
13 (2mtpa).

 Nalco's view on aluminium prices — The company expects aluminium prices
to remain around $2,400-2,700/t through 2011, supported to an extent by
increased costs. Nalco is not particularly worried about the large amount of
inventory locked up in financial deals.
 Strong balance sheet — Cash balance was Rs51bn as of March 2011. The
expansion capex has been funded through internal accruals and Nalco has zero
debt. Capex was ~Rs6.5bn in FY11 and expected to be Rs11bn in FY12. Nalco
does not expect to raise debt for its medium-term domestic expansion plans.

Nalco: Results miss estimate on high staff costs:: Kotak Securities

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National Aluminium Co (NACL)
Metals & Mining
Results miss estimate on high staff costs. Nalco’s 4QFY11 revenue of Rs17.9 bn
(+11.5%yoy, +25.4% qoq) was 7.9% ahead of our estimates. However, EBITDA of
Rs4.5 bn was below our estimate primarily on higher-than-expected staff costs. We
align Nalco’s earnings estimate with our aluminium price forecast and build in recent
changes in carbon and coal prices. As a result, we lower FY2013E EBITDA by 7.4%.
Nalco trades at expensive valuations of 18.3X FY2012E and 17.3X FY2013E earnings.
Maintain SELL with a TP of Rs76 based on end-FY2013E financials.

NALCO - Buy :: Can money

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Fundamental Reasons:-
Nalco is a public sector mining behemoth which was incorporated in 1981, as a public sector enterprise of the
Government of India. Over the years, on account of its rapid expansion and proven processes, company catapult into
the big league of “ Navratna”. NALCO is having Asia’s largest integrated Aluminum complex, which encompassing
bauxite mining, alumina refining, Aluminum smelting and casting, power generation, rail and port operations. Since
its inception, Nalco zeroed upon the coveted field of Aluminum & various allied products. In India, Company is
having the largest aluminum manufacturing capacity in government sector, while second largest on overall basis.(
HINDALCO is the largest aluminum manufacturing company in India).
NALCO has reported its’ Q-3;FY2011 result, very much inline with the market expectations. Mainly on account of
the all round performance by its all verticals(processing, mining etc) and higher realization, NALCO has reported an
excellent surge in the bottom-line and moderate rise in the topline. Based on the improving economic conditions,
higher export and good margins, company have registered a good performance after countering the net impact of
surging cost. Total revenue of the company rose to Rs.1443.12 Crore as compared to Rs.1417.61 Crore in DEC’09,
showing a YoY growth of 1.79%, while total profit during the said period recorded at Rs 255.95 Crore against a figure
of Rs 155.18 Crore on Y/Y basis a rise of 14.93%. During the said period , Earning per share of the company also
has improved significantly and recorded to Rs 1.99 from a average value of Rs 1.20 as on 31st DEC; 2009. Apart
from higher realization, effective cost management helped the company in recording this good performance.
NALCO is expected to garner good revenue and profit in coming quarters because of following facts: - 1. Nalco's Rs
4,402 crore expansion plan to raise alumina refinery capacity from 1.575 million tonnes to 2.1 million tonnes are at
advance stages of commissioning. 2. In order to save its EBDITA margins, Nalco raised aluminum prices by Rs. 5000
a tonne. 3. National Aluminum Company has planned Rs 700 crore capital expenditure in 2011-12 for expansion of
refinery in Orissa and setting up a nuclear power project in Gujarat. This may add visibility to the growth of top line
& Bottomline in future. 4. Global production of Aluminum currently stands at 39-40 million tonnes per annum.
Demand also stands at around the same level. Meanwhile, some smelters have been closed in China in the recent
past, leading to firming up of the price. 5. National Aluminum Company Limited is likely to set up its refinery near
Makavarapalem in Visakhapatnam district. The 1.4 million metric tonne capacity green field refinery at an estimated
investment of more than Rs 4000 crore is expected to be commissioned in next three years. All these will augment
the value of shareholders.
Metal & Mining sector is associated with other industrial verticals in our Country. Though, NALCO owing to its
dominant position and higher reach may be the highest beneficiary of any uptrend in the sector. Yet Cyclical nature
of the industry & insalubrious working condition may continue to be a concern. Higher volatility in the currency
market may continue to add jitter in the Metal & Mining stocks. Rupee likely to be volatile with FII inflows expected
to determine the medium term movements. Recovery issues in US and Euro Zone economies and in case of any
abrupt withdrawal by FIIs, NALCO may witness some temporary corrections before moving up