Published on 2/11/2020 10:31:45 AM | Source: Motilal Oswal Financial Services Ltd

Buy National Aluminium Company Ltd For Target Rs.42 - Motilal Oswal

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LME recovery and lower costs to improve profitability

Cost reduction leads to better-than-expected profitability

* Nalco (NACL) surprised with higher-than-expected EBITDA at INR1.29b (est.: INR81m), led by cost reduction in the Aluminum business. However, it was down 33% YoY due to lower prices and volumes.

* We raise our FY21 EBITDA estimate by 67% to factor recovery in LME prices, but maintain FY22 estimates. Maintain Buy.


EBITDA declines 40% YoY due to lower LME and volumes

* Revenue declined 34% YoY (29% QoQ) to INR13.8b on a lower LME aluminum price of USD1,493/t (-17% YoY; -12% QoQ) and lower aluminum volumes.

* EBITDA at INR1.3b (-38% QoQ) came in above our estimate of INR81m despite lower-than-expected volumes. We believe this was due to a reduction in fixed cost and other discretionary costs as other expenses declined 49% YoY to INR2.1b. Reported EBITDA still declined 40% YoY on lower alumina and aluminum prices.

* The company reported PAT of INR166m (our estimate: loss of INR472m).

* Aluminum: It reported positive EBIT at INR470m after four quarters (v/s INR3m loss last year); revenue declined to INR9.3b (-37% YoY; -18% QoQ) on lower LME prices/volumes due to the impact of COVID-19. Aluminum production was at 98kt (-11% YoY; -3% QoQ). We estimate NACL’s aluminum sales at 73kt, impacted by lockdown in 1QFY21. Derived realization declined 17% YoY (and 11% QoQ) to USD1,700/t on account of lower LME. Implied CoP was down 13% QoQ to USD1,613/t (-20% YoY).

* Alumina: Revenue (incl. inter-segment) was at INR7.7b (-17% YoY; -34% QoQ) and EBIT at INR415m (-73% YoY; -77% QoQ)


Valuation and view

* Aluminum LME prices have recovered to pre-COVID levels and turned positive YoY. Alumina prices are also hovering near pre-COVID levels. Accordingly, we have raised our LME aluminum estimate to USD1,675/t in FY21 (earlier USD1,575/t) and USD1,750/t (earlier USD,1700/t) in FY22. With integrated operations, NACL is best placed to benefit from recovery in prices.

* We expect NACL to benefit from lower coal prices due to improved coal availability in India and lower input commodity costs such as furnace oil, etc. We maintain our positive stance on NACL considering its integrated business model, high cash levels, and attractive dividend yield.

* We value the stock at 5.5x FY22E EV/EBITDA to arrive at TP of INR42. Buy


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