Published on 21/09/2019 11:42:05 AM | Source: Motilal Oswal Services Ltd

Option Strategy National Aluminium Company Ltd by Motilal Oswal

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Higher cost and lower realization impact performance

Cutting estimates to factor in alumina/LME price decline

EBITDA of INR2.1b (-59% QoQ) came in below our estimate of INR4.3b owing to higher aluminum cost of production, lower-than-expected aluminum volumes and likely lower alumina volumes. The sequential decline in EBITDA can be attributed to lower alumina/LME prices and higher cost. Adj. PAT was down 69% QoQ at ~INR1b (our estimate: INR2.6b).

* Aluminum: Production was steady QoQ at 111kt, while sales were down 12% QoQ at 103kt. Realizations declined 1% QoQ to USD2,049/t on account of lower LME prices, partly offset by better premiums. Implied CoP increased 10% QoQ to USD2,017/t due to higher fuel costs and lower scale benefits.

* Alumina: Assuming alumina realizations of ~USD369 (avg. 1Q prices), the sales decline stands at 39% QoQ to 231kt.


Cutting estimates to factor in lower alumina/LME prices; Maintain Buy

* Alumina prices have come under pressure recently due to the restart of Hydro’s Alunorte refinery, weak aluminum LME prices and muted demand. Prices have fallen below their margin cost of production of ~USD350/t, and thus, we believe that there is scope for prices to recover.

* We cut our FY20 estimate for alumina price from USD355/t to USD340/t and for average LME price from ~USD1,861/t to ~USD1,804/t. Our FY20/21 EBITDA estimate is lowered by 32%/12% to INR10.8/INR14.5b.

* We believe alumina/aluminum LME prices are close to bottom as, at the current levels, ~10% of global smelters/refiners (particularly Chinese) would be in cash losses. NACL is best placed to benefit from higher prices. We value the stock at 5x FY20E EV/EBITDA. Our TP stands at INR50/share. Maintain Buy.


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