National Aluminium Company: HOLD
Global aluminium prices have been on a downtrend in the last few years. This has weighed on National Aluminium Company (Nalco) with its stock price falling around 30 per cent since last December to Rs 37 currently.
The company’s margins are stabilising due to higher sale of alumina and lower input costs. Also, Nalco’s revenues are likely to grow as alumina sales pick up. The stock trades at a discount to its global peers — Alcoa and Norsk Hydro (price-to-forward earnings of around 20 times) — and to its historic levels of over 20. However, the stock’s price-to-FY15 earnings ratio of around 11 times is at a premium to peers such as Hindalco and Sesa Sterlite, which trade at around 9 and 6 respectively. Investors can hold their position as the stock is richly valued even after steep price correction.
Alumina helps profit
Nalco has been able to shore up profits, despite losses in its aluminium segment, thanks to increasing sales of high margin alumina. The company’s aluminium business, which accounts for around half the revenues, has been making losses for the past two years. This has been due to a steep drop in global aluminium prices to $1,800 from over $2,600 in early 2011. Also, as the smelting process is power-intensive, increase in coal cost has hurt margins. To curtail the losses, smelters were shuttered; since last year, revenues from the metal business have dropped around 20 per cent.
Global aluminium prices are expected to remain under pressure. Also, the premiums for actually getting the metal delivered are expected to come down once the London Metal Exchange (LME) warehousing rules take effect in April.
When this happens, supplies are likely to improve, further reducing prices. That said, continued smelter closures and expected pick-up in automobile and aerospace sectors would help balance supply and demand.
Given the weak prices, Nalco reduced aluminium output and exported the raw material, alumina, thereby earning higher margins. In the September quarter, alumina sales increased 20 per cent Y-o-Y to 374,000 tonnes while aluminium sales declined over 25 per cent to 75,000 tonnes.
The company’s large ore capacity — 310 million tonnes of open-cast bauxite mines in Odisha with an output of 6.8 million tonnes per annum — places it at an advantage to competitors such as Sesa Sterlite.
The company’s fuel costs reduced in the September quarter, due to prior procurement of coal. Also, thanks to its captive 1,200 MW thermal power generation plant, power costs tend to be low. Progress in the approval for the Utkal E coal block, which has been pending for over two years, will help further bring down fuel costs, boosting profits.
Nalco’s revenue, which witnessed an annual growth rate of over 5 per cent, should benefit from higher alumina sale and planned capacity expansions.
The company plans to expand alumina output by one million tonnes per annum by 2016 through the newly secured access to 65 mt bauxite reserve. It is also expanding capacity in Gujarat through a joint venture with Gujarat Mineral Development Corporation (GMDC). Also, alumina prices are expected to be stable globally due to demand from smelters abroad, which have access to low-cost power. Even locally, Vedanta had offered to buy alumina at a 7-10 per cent premium to the export price; the offer was rejected by Nalco due to its policy of not selling alumina locally. Still, continuing weakness in metal demand and prices weigh on revenue growth.
This is because alumina prices are around one-sixth that of aluminium. Also, any steep reduction in global aluminium demand and prices may begin to weigh on alumina volume and realisations, hurting revenue growth.
Nalco also derives revenue from the sale of electricity from its captive thermal and two wind power plants. It also plans to set up a 700 MW nuclear plant in Gujarat, as a joint venture with Nuclear Power Corporation.
Nalco is debt-free and has a cash balance of around Rs 5,300 crore as of September. The company pays regular dividend and the current dividend yield is around 3 per cent.
The company’s FY-13 revenues increased 5 per cent Y-o-Y compared with 9 per cent in FY-12. Profit margin for the year was also lower at around 8 per cent compared with 13 per cent a year ago.
However, in the recent September quarter, revenue increased 8 per cent Y-o-Y to Rs 1,710 crore and profit margin was over 10 per cent. Profits increased significantly from Rs 4 crore last September quarter to Rs 180 crore this year, helped by alumina sales.
There was an offer for sale (OFS) in March (floor price of Rs 40) when the government reduced its stake from 87 per cent to 81 per cent. There is no proposal for additional stake sale by the government.
Source: The Hindu Business Line