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’.

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Rains/coal issues impact alumina/aluminium production

Alumina production was impacted (476kt, down 7% QoQ) by heavy rains affecting bauxite mining. However, the loss can be made up in subsequent quarters. Aluminium production was controlled (103kt, down 1% QoQ) due to shortage of linkage coal and low LME prices. Management does not expect significant recovery in aluminium production run rate until LME prices improve significantly.

Other points

·       Raw material cost remained high with prices of caustic soda, CP coke, aluminium fluoride and most importantly coal remaining at elevated levels. Employee cost rose 11% QoQ due to pension provisioning and likely to be INR10-11bn in FY13.

·       NALCO maintains full year capex guidance at INR23bn (spent INR2.5bn in Q1FY13).

·       Pending land acquisition, it expects captive coal production to commence in FY14.

·       Expects some pressure on alumina prices (Q1FY13 realisation at USD341/t) due to aluminium production cuts.   

Outlook and valuations: No positive triggers; maintain ‘REDUCE’

In the absence of positive triggers and expensive valuations (6.1x FY14E EV/EBITDA) we maintain ‘REDUCE/Sector Underperformer’. We value the stock at 5.5x FY14E EV/EBITDA yielding us a price target of 50/share.

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

Regards,