Nalco Result Review by PINC Research

Nalco Result Review by PINC ResearchIn Q3FY11, Nalco's revenues increased by 2% YoY to Rs14.4bn on higher LME aluminium (up 19% YoY to USD2,338/t) even though metal sales declined 12% YoY to 104kt. EBITDA grew 32% YoY to Rs3.9bn & OPM expanded 610bps to 27.0%. PAT rose 65% YoY to Rs2.6bn aided by lower tax rate.

Volume: While alumina and aluminium output remained flat YoY at 399kt and 112kt respectively, sales declined to ~162kt (down 9% YoY) & ~104kt (down 12% YoY) respectively on inventory built-up.

Operating cost rises: Despite lower annual contract cost of RMs (caustic soda, lime, CP coke, CT pitch), operating cost for aluminium rose 9% YoY to USD1,754/t on higher coal and staff cost.

Project Status: Alumina expansion of 525ktpa at Damanjodi is delayed further and now expected by Q4FY11 end.

Strong balance sheet: Nalco has cash and eq. of Rs47.6bn.

Share bonus and split: Nalco has announced bonus share of 1:1 and split of one share of FV Rs10 into 2 shares of FV Rs5 each.

OUTLOOK

During 2010, while LME copper have risen by 29%, aluminium have risen by only 10%. On the other hand, input cost, mainly alumina and power, has continued to rise. We believe that LME aluminium prices at USD2,500/tonne is sustainable due to cost push and demand growth from China despite inflation concerns. We have revised our assumptions for LME aluminium to USD2,250 (USD2,150) & USD2,400 (USD2,300) for FY11 & FY12 respectively. However, we have lowered our estimates for Nalco’s alumina sales volume to factor in the continuing delay in the brownfield expansion.

VALUATIONS AND RECOMMENDATION

Nalco is one of the lowest cost producers of aluminium globally with integrated bauxite, alumina and power. Further, with ~USD1.0bn of cash, the company has a strong balance sheet. However, continuing delay in brownfield expansion and overvaluation (trading at FY12E 8.5x EV/EBITDA, 17.7x P/E) are main concerns for the stock. Maintain 'SELL' with a revised TP of Rs320 (6x FY12E EV/EBITDA).