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National Aluminium (NALU.BO)
Global Update: Ally Prices Raised; but Stock Not Cheap
TP and multiple cut — Our PAT estimates rise 12%/5% in FY12/FY13 as we
incorporate a 7-10% hike in alumina/aluminium prices based on our global estimate
changes and higher coal/raw material costs. However, our TP is cut to Rs86 as we 1)
reduce our target P/E multiple to 11x (from 13x) in line with global majors; 2) roll
forward to Jun12 (from Mar12); 3) take cash/share at Rs24 (from Rs23). We reduce our
target multiple as global average P/E multiples for aluminium stocks have come off
from ~13x CY11E earnings to ~11x.
Stock not cheap; Hindalco preferred — At our TP, Nalco’s implied FY12 PE would be
12.4x (5-year avg ~17x) and does not appear cheap as it is currently trading at 12.8x
FY12 PE. Hindalco (HALC.BO; Rs198.30; 1M) offers better value and is our preferred
metal play for more earnings stability in a volatile price environment.
Aluminium: preferred metal — From a global perspective, we maintain our relatively
positive view on aluminium, and expect prices to be sustained at around $2,600/t
through 2013. Two issues will be key in determining prices: 1) Power cuts in China to
lead to closure of old capacity and production curtailments; 2) Potential for large level
of inventory locked up in financing deals to remain so for quite some time yet.
Costs: a key concern — Lower availability of linkage coal (84% now vs. 90%
expected) and poor-quality coal continues to be an issue for Nalco. It will be adversely
impacted in FY12 as linkage coal usage may remain around 85% and prices have
been raised ~30% in end-Feb. Benefit from captive coal will only come FY14 onwards.
Higher alumina output and lower raw material costs will help increase alumina margins.
Sensitivity to prices — A 5% change in aluminium prices would impact FY12 PAT by
15%. A 5% change in Rs/US$ rate would impact FY12 PAT by ~15%.
Upside risks — Higher prices and/or volumes; rupee depreciation.
National Aluminium
Company description
Nalco will have alumina capacity of 2.1m tpa (by 1QFY12) and has aluminium
smelter capacity of 460,000 tpa based in Orissa in eastern India. Good-quality
bauxite, open-cast mines and low bauxite transport costs make Nalco one of the
world's lowest-cost alumina producers. It sells surplus alumina in international
markets, and is India's largest alumina exporter. It has 1,200MW of thermal power
capacity which meets in-house requirements at about half of grid cost, and any
surplus power is sold to the state grid. It plans to raise alumina capacity marginally
to 2.3m tpa by 2012 and is looking for potential locations for further expansion of
alumina and aluminium capacity. Nalco has received government approval for a
bauxite mine in Andhra Pradesh and once they get the necessary approvals, they
will set up an alumina refinery in the state at a capex of Rs6bn. Nalco is awaiting
government approval for a JV in Indonesia to set up 500,000 tpa of aluminium
smelter capacity and 1,250MW of captive power at an estimated capex of Rs180bn.
In order to diversify, it is considering a JV for a nuclear power plant. It is also setting
up wind power capacity and thinking of setting up a titanium project.
Investment strategy
We rate Nalco shares Sell/Low Risk (3L). Our aluminium price forecasts are based
on our global price estimates of around US$2,600-2,700/t for both FY12 and FY13.
Aluminium is one of our preferred metals. Two issues will be key in determining
prices: 1) Power cuts in China to lead to closure of old capacity and production
curtailments; 2) Potential for large level of inventory locked up in financing deals to
remain so for quite some time yet. As Nalco’s aluminium volumes have already
been ramped up in FY10, we expect volume growth of 3% p.a. in FY12E and
FY13E. The recent expansion, which is just getting completed (capex Rs44bn), has
been funded through internal accruals and Nalco has zero debt. Its cash balance as
of March 2011 was ~Rs51bn (Rs23/share) and Nalco does not expect to raise debt
for capex plans for medium-term domestic expansion plans.
Valuation
We use P/E to value Nalco as it is driven largely by commodity price trends, which
translate into earnings momentum. Our target price of Rs86 is based on 11x core
PE (Rs63), to which we add cash per share of Rs24. Our target multiple of 11x on
Jun12 earnings is in line with the average of global aluminium majors. Nalco’s
average PE trading multiple in the past five years has been 17x. We have
consciously kept the target multiple lower than Nalco’s 5-year average multiple as
we are using high LME price estimates. Based on our target price of Rs86, Nalco's
FY12E EV/EBITDA equates to 5.3x and PE of 12.4x.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, suggests a Low Risk rating for Nalco. Based on its status as an integrated
aluminium producer, one of the lowest-cost producers in the world for alumina and
net cash position, we feel Low Risk is justified. Upside risks that could cause the
shares to trade above our target price are: 1) Higher-than-expected aluminium
prices; 2) Rupee depreciation; 3) Higher volumes than we expect.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
National Aluminium (NALU.BO)
Global Update: Ally Prices Raised; but Stock Not Cheap
TP and multiple cut — Our PAT estimates rise 12%/5% in FY12/FY13 as we
incorporate a 7-10% hike in alumina/aluminium prices based on our global estimate
changes and higher coal/raw material costs. However, our TP is cut to Rs86 as we 1)
reduce our target P/E multiple to 11x (from 13x) in line with global majors; 2) roll
forward to Jun12 (from Mar12); 3) take cash/share at Rs24 (from Rs23). We reduce our
target multiple as global average P/E multiples for aluminium stocks have come off
from ~13x CY11E earnings to ~11x.
Stock not cheap; Hindalco preferred — At our TP, Nalco’s implied FY12 PE would be
12.4x (5-year avg ~17x) and does not appear cheap as it is currently trading at 12.8x
FY12 PE. Hindalco (HALC.BO; Rs198.30; 1M) offers better value and is our preferred
metal play for more earnings stability in a volatile price environment.
Aluminium: preferred metal — From a global perspective, we maintain our relatively
positive view on aluminium, and expect prices to be sustained at around $2,600/t
through 2013. Two issues will be key in determining prices: 1) Power cuts in China to
lead to closure of old capacity and production curtailments; 2) Potential for large level
of inventory locked up in financing deals to remain so for quite some time yet.
Costs: a key concern — Lower availability of linkage coal (84% now vs. 90%
expected) and poor-quality coal continues to be an issue for Nalco. It will be adversely
impacted in FY12 as linkage coal usage may remain around 85% and prices have
been raised ~30% in end-Feb. Benefit from captive coal will only come FY14 onwards.
Higher alumina output and lower raw material costs will help increase alumina margins.
Sensitivity to prices — A 5% change in aluminium prices would impact FY12 PAT by
15%. A 5% change in Rs/US$ rate would impact FY12 PAT by ~15%.
Upside risks — Higher prices and/or volumes; rupee depreciation.
National Aluminium
Company description
Nalco will have alumina capacity of 2.1m tpa (by 1QFY12) and has aluminium
smelter capacity of 460,000 tpa based in Orissa in eastern India. Good-quality
bauxite, open-cast mines and low bauxite transport costs make Nalco one of the
world's lowest-cost alumina producers. It sells surplus alumina in international
markets, and is India's largest alumina exporter. It has 1,200MW of thermal power
capacity which meets in-house requirements at about half of grid cost, and any
surplus power is sold to the state grid. It plans to raise alumina capacity marginally
to 2.3m tpa by 2012 and is looking for potential locations for further expansion of
alumina and aluminium capacity. Nalco has received government approval for a
bauxite mine in Andhra Pradesh and once they get the necessary approvals, they
will set up an alumina refinery in the state at a capex of Rs6bn. Nalco is awaiting
government approval for a JV in Indonesia to set up 500,000 tpa of aluminium
smelter capacity and 1,250MW of captive power at an estimated capex of Rs180bn.
In order to diversify, it is considering a JV for a nuclear power plant. It is also setting
up wind power capacity and thinking of setting up a titanium project.
Investment strategy
We rate Nalco shares Sell/Low Risk (3L). Our aluminium price forecasts are based
on our global price estimates of around US$2,600-2,700/t for both FY12 and FY13.
Aluminium is one of our preferred metals. Two issues will be key in determining
prices: 1) Power cuts in China to lead to closure of old capacity and production
curtailments; 2) Potential for large level of inventory locked up in financing deals to
remain so for quite some time yet. As Nalco’s aluminium volumes have already
been ramped up in FY10, we expect volume growth of 3% p.a. in FY12E and
FY13E. The recent expansion, which is just getting completed (capex Rs44bn), has
been funded through internal accruals and Nalco has zero debt. Its cash balance as
of March 2011 was ~Rs51bn (Rs23/share) and Nalco does not expect to raise debt
for capex plans for medium-term domestic expansion plans.
Valuation
We use P/E to value Nalco as it is driven largely by commodity price trends, which
translate into earnings momentum. Our target price of Rs86 is based on 11x core
PE (Rs63), to which we add cash per share of Rs24. Our target multiple of 11x on
Jun12 earnings is in line with the average of global aluminium majors. Nalco’s
average PE trading multiple in the past five years has been 17x. We have
consciously kept the target multiple lower than Nalco’s 5-year average multiple as
we are using high LME price estimates. Based on our target price of Rs86, Nalco's
FY12E EV/EBITDA equates to 5.3x and PE of 12.4x.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, suggests a Low Risk rating for Nalco. Based on its status as an integrated
aluminium producer, one of the lowest-cost producers in the world for alumina and
net cash position, we feel Low Risk is justified. Upside risks that could cause the
shares to trade above our target price are: 1) Higher-than-expected aluminium
prices; 2) Rupee depreciation; 3) Higher volumes than we expect.
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