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Lower LME take toll on profits
* Topline at Rs27.2bn was down 11% on a qoq basis, driving EBITDA down 40% sequentially to Rs5.1bn, driven by lower LME and higher raw material costs.
* Lifting of sanctions on RUSAL and the restart of the Alunorte alumina facility of Norsk Hydro and closure of nearly 0.8mt aluminium capacity in China will likely result in softening alumina prices going forward.
* PAT at Rs3bn was down 41% sequentially, driven by lower EBITDA. Given the weak nearterm outlook for alumina, we reduce our FY19/20 estimates and revise our target price to Rs64. Downgrade to Accumulate.
*Despite an 11% sequential drop in the revenues, total costs have reduced only by 1%. Raw material costs rose 4% sequentially, while the other costs increased 31% sequentially, resulting in a short correction in the EBITDA.
* Aluminium prices corrected only by 4% sequentially. However, the fall in Alumina prices has been sharper.
* The company has received a three-year bridge linkage for coal till it opens its captive mine to augment coal supplies for 1200MW captive power generation. The bridge linkages are on account of delays in obtaining EC/FC clearance for its Utkal D and Utkal E coal blocks. The cost of production is likely to reduce substantially after the commencement of captive mines.
* Nalco is also planning to set up the second caustic soda plant at Paradip in JV with Gujarat Alkalis, which will further reduce its cost of alumina. However, the new plant will take a few years before starting production from the plant.
* Given the recent correction in alumina prices on the back of smelter closures globally and the restart of Norsk Hydro alumina facility, we anticipate a shortage in alumina, witnessed until last quarter will now ease off. We revise our FY20 EBITDA estimate down by -25 %. Downgrade to Accumulate with a revised target price of Rs64.
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