National Aluminium Company Ltd : Strong quarter but outlook remains weak; maintain Sell - Emkay Global
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Sell National Aluminium Company Ltd For Target Rs. 37 - Emkay Global
* While the topline was in line with our estimates of Rs24bn, EBITDA beat of 13% was driven by a 2% beat on total expenses, highlighting the subdued operating environment for Nalco. The premium over LME stood at a 15-quarter low of USD51/t.
* Nalco’s EBITDA rose 57% qoq vs. 24% for Hindalco’s standalone EBITDA. We believe Hindalco has more efficient operations than Nalco, and Nalco’s outperformance could be due to one-off items. Nalco’s RM cost was down 26% qoq, which is a surprise.
* We believe that Nalco is likely to embark on a large capex program spread over several years and its returns will be largely back-ended. The company has so far not updated its revised capex plan in terms of time and cost overrun, which is a concern.
* Though Q3 was a surprise and strong LME has resulted in an 18% upgrade of our FY22E EBITDA, we reiterate Sell as we expect alumina surplus to persist. We are raising the TP to Rs37 from Rs33.
* Capex all set to increase, with returns substantially back-ended: Nalco has already embarked upon a capex program of Rs300bn for the next 6-7 years. The plan includes expansion of alumina refinery by 1mt, aluminum smelter by 0.5mt, operationalizing Panchpatmali bauxite mines, Utkal C & D coal blocks, Caustic Soda plant in JV and wire rod mill of 0.6mt. Several of these projects have been in the planning stage since FY16. However, no major project has since been commissioned. We also note that no substantial capex was incurred on growth projects in past, in our view. We expect the multiples to derate going forward as the company enters the capex phase.
* Global Alumina balance - no more surprises in store: With the Paragominas mines of Norsk back in production two weeks before schedule, we believe that merchant alumina supplies will continue to ramp up. Further, Vedanta has been increasing domestic sourcing of bauxite from Odisha State PSU - OMC and will likely to ramp up captive alumina production, pushing down demand for merchant alumina further.
* Outlook and valuation: The stock is trading at 5.3x our FY22E EV/EBITDA. We believe that a strong back-ended capex line-up and aluminum market remaining in surplus, there is a risk of further project delays the aluminum/alumina prices correct from current levels. Maintain Sell with a revised TP of Rs37 (Rs33 earlier). Key risk is any disruption in bauxite/merchant alumina supplies, which can lead to shortage in the merchant alumina market.
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