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Robust show; cost efficiencies in offing

NALCO’s Q4FY23 EBITDA of Rs7.7bn (down 53% YoY, up 64.6% QoQ) was significantly ahead of consensus and our estimates of Rs5.4bn primarily on lower than expected power and fuel cost. Key points: 1) EBITDA margin at 20.9% rose 691bps QoQ mainly on lower coal cost- down 20% QoQ; 2) profitability at both aluminium (Al) and chemicals division (alumina) recovered sequentially owing to lower power and fuel cost and higher realisation; and 3) commencement of Utkal D coal block from Apr’23 is expected to further aid profitability.

Going ahead, despite our assumption of moderating Al price, we believe commencement of mining at Utkal D block is a key positive. As a result, we expect EBITDA margin to improve to 22% through to FY25, compared to 20.9%. We introduce FY25 financials at this stage and rollover the valuation to FY25E EBITDA. Our revised TP works out to Rs86 (earlier Rs79) on an unchanged 4.5x FY25E EBITDA. We upgrade NALCO stock to ADD (from Hold).

* Good performance on lower cost: NALCO’s EBITDA of Rs7.7bn (down 53% YoY) was 30% ahead of our estimates and consensus. Key points: 1) Al plant operated at full capacity in Q4FY23 with all 960 pots in operation; 2) mining operations at Utkal D block commenced from Nov’22 and pre-production activities continued until the end of Mar’23. Coal production has commenced from Apr’23; 3) as a result of lower e- auction prices and improved coal availability, power and fuel cost declined 20% QoQ to Rs8.8bn; 4) alumina division EBIT was up sharply (274% QoQ) at Rs2.4bn due to higher alumina prices and lower power and fuel cost; 4) EBIT at Al division rose 81% QoQ to Rs5.1bn owing to higher LME Al price and lower power cost. Going ahead, we see operationalisation of Utkal D block and Al plant operating at full capacity as key positives.

* Cost efficiencies likely to partially offset the weakness in LME Al price: Utkal D block (2mtpa) has commenced production in Apr’23 and is likely to reduce the cost of operations further. Besides, the commissioning of caustic soda plant at Dahej in JV with GACL will also help the company in keeping low costs. We believe commissioning of 5th stream of alumina refinery and commencement of operations at Utkal D & E coal blocks would further aid volume growth in alumina segment and lower power cost for Al division. That said, owing to surplus in Al market, we expect prices of both alumina and aluminium to come under pressure, thus, restricting margin improvement to 22% by FY25.

* Outlook: Commencement of production at Utkal D is a major positive. We believe consensus estimates are prone to upwards revision as cost benefits from Utkal D block commissioning are likely to be factored in. Considering the upcoming cost efficiencies from Utkal D block operationalisation, we raise NALCO to ADD (from Hold) with a revised TP of Rs86 (earlier Rs79) on 4.5x FY25E EBITDA.

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