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Beneficiary of higher aluminum prices

Retain Buy on strong earnings outlook

* Nalco (NACL)’s 4QFY21 result was strong, led by higher LME prices and lower costs. It reported EBITDA of INR9.4b (+118% QoQ) and PAT of INR6.3b (+162% QoQ).

* We raise our FY22E/FY23E EBITDA estimate by 43%/27%, factoring in higher aluminum prices, which should support strong cash flows and a good dividend payout. Maintain Buy

Higher LME and lower costs boost EBITDA by 118% QoQ

* Revenue / EBITDA / Adj. PAT was up 19%/118%/162% QoQ to INR28.2b/INR9.4b/INR6.3b (+3%/49%/63% v/s our estimate).

* The beat on EBITDA was led by better-than-expected costs, partly owing to the reversal of renewals purchase obligations – as per the notification issued by Odisha Electricity Regulatory Commission – booked under other expenses. Employee cost was down 11% QoQ to INR4.31b and other expense 31% QoQ to INR2.8b.

* The company has opted for the new tax regime, thus reversing its deferred tax liabilities by INR4.23b – leading to net tax credit of INR0.97b during the quarter. Adjusted PAT, thus, stood at INR6.3b (+162% QoQ; +63% v/s est).

* FY21 rev / EBITDA / adj. PAT stood at INR89.5b/INR17.8b/INR9.9b (+6%/+2.6x/+6.0x YoY). OCF/FCF stood at INR22.0b/INR9.8b (v/s – INR3.5b/–INR12.0b).

* Aluminum: It reported EBIT at INR5.9b (up 273% QoQ). Revenue rose 19% QoQ to INR19.4b on higher LME (USD2,093/t; +9% QoQ) and higher volumes. Aluminum production was up 10% QoQ to 112kt.

* Alumina: Revenue (including inter-segment) stood at INR12.1b (+23% QoQ). EBIT came in at INR2.96b (+65% QoQ). Alumina external sales rose 10% QoQ to 378kt.

Valuation and view

* With spot LME aluminum hovering at ~USD2,450/t+ (up ~10% YTDFY22), the near-term profitability outlook is strong. Alumina prices have not yet reacted to the strength in aluminum and could surprise positively in FY22. With integrated mining operations, NALCO is the best play on higher LME prices.

* Given the tight demand-supply scenario, we expect aluminum prices to remain strong. Although, prevailing higher inventory could limit a further upside. We factor in LME prices of USD2,300/USD2,150 per tonne for FY22E/FY23E.

* The management has announced a 1mtpa alumina refinery expansion at capex of ~INR64b and expects to complete the project in FY23. Given the slow execution, however, we expect commissioning by FY24.

* We value the stock on an SoTP basis at 5x FY23E EV/EBITDA and a 0.75x book value for growth CWIP to arrive at TP of INR93. At CMP, it provides an attractive dividend yield of ~6%. Maintain Buy.

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