Higher costs lead to EBITDA miss

Strong aluminum prices to support earnings

* NALCO’s 1QFY22 result was below our expectations due to higher than expected costs and miss on volumes/realization. EBITDA/adjusted PAT declined by 38%/45% QoQ to INR8.9b/INR3.5b and missed our estimate by 34%/38%.

* We lower our FY22E EBITDA estimate by 10% to factor in higher costs. However, we raise our FY23E EBITDA estimate by 15% as we revise upwards our FY23E LME aluminum assumption by 7% to USD2,300/t. We maintain our Buy rating.

EBITDA declines by 38% QoQ on higher costs

* Revenue/EBITDA/adjusted PAT fell 12%/38%/45% QoQ to INR24.7b/INR5.8b/INR3.5b and was 15%/34%/38% below our estimate. Sequentially, the decline was led by lower volumes and higher costs (on a lower base due to one-offs), partly offset by higher LME prices.

* The miss on EBITDA was led by lower than expected aluminum volumes (91kt, 9% lower than our estimate), lower than expected realizations, and higher than expected costs. Employee cost stood at INR5.8b v/s INR4.3b in 4QFY21 (INR5.2b in 1QFY21).

* Derived aluminum realization came in at USD2,589/t and was 4% lower than our estimate of USD2,691/t. Alumina NSR came in lower at USD274/t and was 10% below our estimate.

* Aluminum: It reported an EBIT of INR4b (-32% QoQ). Revenue declined by 11% QoQ to INR17.4b, despite higher LME (USD2,393/t; +14% QoQ), due to lower volumes (91kt). Aluminum production was flat QoQ at 112kt.

* Alumina: Revenue (excluding inter-segment) stood at INR6.4b (-27% QoQ). EBIT came in at INR1.2b (-60% QoQ). Alumina external sales declined by 16% QoQ to 316kt.

Valuation and view

* With spot LME aluminum hovering over USD2,550/t (up ~15% in FY22 YTD), the near term profitability outlook is strong. Alumina prices have not yet reacted to the strength in aluminum and could surprise positively in 2HFY22.

* We expect higher aluminum prices to absorb the cost shock and lead to improved margin in subsequent quarters. With integrated mining operations, NALCO is the best play on higher LME prices.

* Given the tight demand-supply scenario, we expect aluminum prices to remain strong. We factor in LME prices of USD2,375/USD2,300 per tonne for FY22E/FY23E.

* The management has announced a 1mtpa alumina refinery expansion at a capex of ~INR64b, and expects to complete the project in FY23. Given its slow execution, we expect commissioning by FY24E.

* We value the stock on a SoTP basis at 5x FY23E EV/EBITDA and at 0.75x book value for growth CWIP to arrive at our TP of INR107. At the CMP, it provides an attractive dividend yield of ~5%. We maintain our Buy rating.

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