IGI Logo

EBTIDA and PAT disappoint despite higher volumes

Higher input cost drastically impacts profitability

* Consolidated sales fell 3% YoY and 8% QoQ to INR34.9b in 2QFY23. Sales were 16% ahead of our estimate, led by higher than expected Alumina sales volume.

* Alumina sales volume rose 26% YoY and 79% QoQ to ~400kt, while aluminum sales fell 13% YoY and 11% QoQ to 109kt. We believe NACL has been carrying excess alumina inventory, which has been liquidated in 2QFY23.

* Alumina ASP fell 9% YoY and 20% QoQ to USD371/t in 2QFY23 on falling LME alumina prices. Aluminum ASP fell 6% YoY and 15% QoQ to USD2,660/t. Both alumina and aluminum ASP were in line with our estimates.

* Consolidated EBITDA fell 70% YoY and 62% QoQ to INR3.3b, 37% lower than our estimate of INR5.3b. Higher power and fuel costs and other manufacturing expenses impacted margin, which collapsed to 9.6% v/s 23% in 1QFY23. We do not expect any meaningful recovery in margin in the near term.

* We note that the poor performance of the company is despite reporting a 23% QoQ lower employee expense for which there is no explanation in the results. We believe there is a possibility of a one off in the employee expense which could have led to ~INR1b savings in employee costs. We await clarity from the management on the same.

* APAT fell 80% YoY and 73% QoQ to INR1.5b, 51% lower than our estimate of INR3.1b, driven by an EBITDA miss, despite employee cost savings of ~INR1b. It recorded a loss of INR 0.45b in its JV for which no details are available in the result press release. We expect a clarification from the management on the same.

* Aluminum prices on the LME fell 11% YoY and 18% QoQ to USD2,354/t in 2QFY23.

* Sales/EBITDA/APAT stood at INR73b/INR12b/INR7b in 1HFY23. While sales grew 20% YoY in 1HFY23, EBITDA/APAT fell 30%/34% led by higher coal costs. Average prices on the LME were flattish YoY in 1HFY23.

See more headwinds for alumina than aluminum ahead

* NACL is one of the lowest cost producers of alumina globally. With more and more aluminum smelters being shut due to the ongoing energy crisis, the merchant alumina market is likely to swing into surplus as the energy crisis deepens.

* At the same time, rising coal costs will continue to impact profitability.

* With no volume growth in sight over the next few years, and with rising capex and no returns, dividends will dip as profitability erodes.

Valuation and view

* NACL trades at 5x/4.5x FY23E/FY24E EV/EBITDA. On a P/B basis, the stock trades at 1x/1x FY23E/FY24E BV.

* While we raise our FY23 revenue estimate by 5% to factor in a strong revenue beat in 2Q, we cut our EBITDA/APAT estimate by 30%/35% to factor in higher coal costs. We also reduce our FY24 sales/EBTIDA/APAT estimate by 3%/41%/45% to reflect our lower LME aluminum/alumina price assumption of 8%/2%, with an elevated cost structure.

* We note that the current valuations are reasonably pricing a slowdown in earnings while leaving open the possibility of an upside that may arise out of China’s economic stimulus or imposition of an aluminum trading ban by the LME on RUSAL. We accordingly downgrade the stock to Neutral with a revised TP of INR70 (from INR86 earlier), valuing the stock at 5x FY23E EV/EBITDA.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer