Lower input costs to support profitability
Cost to decline further
* NACL reported an improved 4QFY20 result, as expected, driven by lower cost of production. Realization, however, remained weak due to lower LME.
* We raise our FY21 EBITDA estimate to factor lower input costs in FY21. Maintain Buy.
Beat led by lower-than-expected costs
* Revenue declined 30% YoY (-7% QoQ) to INR19.4b on a lower LME aluminum price of USD1,694/t (-9% YoY, -3% QoQ).
* EBITDA at INR2.1b (+507% QoQ) came in above our estimate of INR1.2b, led by lower-than-expected production costs. While power and other input costs declined, reported production cost was also likely lower due to the one-off write-back of RPO provisions made earlier. Reported EBITDA still declined 60% YoY due to lower alumina and aluminum prices.
* The company reported PAT of INR1.0b (our estimate: profit of INR0.2b).
* Aluminum: EBIT loss was at INR0.2b (v/s INR1.9b profit last year); revenue declined to INR11.3b (-34% YoY, -15% QoQ) on lower LME prices/volumes due to the impact of COVID-19. Aluminum production was at 102kt, (-8% YoY, +6% QoQ). We estimate NALCO’s aluminum sales at 82kt, impacted by the COVID19 crisis in Mar’20. Realization declined 8% YoY (and 3% QoQ) to USD1,905/t on account of lower LME and premiums. Implied CoP was down 13% QoQ to USD1,861/t (+1% YoY).
* Alumina: Revenue was at INR11.7b (-15% YoY, +16% QoQ) and EBIT at INR1.8b (-38% YoY, +78% QoQ).
* FY20 rev/EBITDA/PAT stood at INR84.7b/INR4.9b/INR1.4b, down 26%/83%/92% YoY.
* Net-Cash at FY20 end stood at INR20.4b (INR11/sh).
* Working Capital in FY20 increased by INR9.1b due to lower sales in Mar-end due to lock-down. As a result, Operating Cashflows (OCF) were negative at INR3.5b. Capex spend for FY20 stood at INR8.6b. As a result, free cashflow (FCF) too was negative at INR12.0b.
* Company paid dividend of INR2.75/sh in FY20 implying dividend yield of ~8%. As a result, dividend outgo (incl. div tax) for FY20 stood at INR6.2b. Company didn’t declare any final dividend for FY20.
Valuation and view
* Alumina/Aluminum LME prices have recovered ~10% from lows witnessed in this year. With estimated gradual recovery in aluminum demand, we expect prices to rise further. We have factored in aluminum prices of USD1,575/t in FY21 and USD1,700/t in FY22. With integrated operations, NACL is best placed to benefit from recovery in prices.
* Improved coal availability, lower input costs, and currency depreciation are likely to offset lower alumina and aluminum prices in FY21. We maintain our positive stance on NALCO considering its integrated business model, high cash levels, and attractive dividend yield.
* We value the stock at 5x FY22E EV/EBITDA to arrive at TP of INR40. Buy
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