Neutral Nalco Ltd For Target Rs.200 by Motilal Oswal Financial Services Ltd
Broad-based beat due to favorable pricing
* Revenue stood at INR46.6b (YoY/QoQ: +39%/+17%) against our est. of INR40.3b, driven by favorable pricing.
* Consolidated EBITDA stood at INR23.3b (YoY/QoQ: +201% /+50%) against our estimate of INR14.3b.
* EBITDA margin stood at 49.9% vs. 38.7% in 2QFY25 and 23.1% in 3QFY24.
* APAT for the quarter stood at INR15.6b (YoY / QoQ: +233% /+50%) against our estimate of INR9.4b. Depreciation was higher due to a charge of INR1.06b related to the impairment of two windmills.
* Alumina sales stood at 375kt, up 9% YoY and 32% QoQ, while metal sales declined 7% YoY and 12% QoQ to 106kt during the quarter.
* The company has declared a second interim dividend of INR4 per share for FY24.
Aluminum business: Strong performance
* Revenue from the aluminum business stood at INR26b, up 13% YoY (-5% QoQ), in line with our estimate of INR25.5b.
* EBIT stood at INR9.5b (+99% YoY and 11% QoQ), in line with our estimate of INR9.6b.
Chemical business: Strong performance
* Revenue from the chemicals business stood in line with our estimate at INR25b, up 48% YoY and 78% QoQ.
* EBIT for the business stood at INR13b, up 492% YoY and 116% QoQ, against our INR4.2b.
Key highlights from the management commentary
* NALCO’s 3QFY25 average NSR stood at USD641/t (9M avg. at USD562/t) and management expects an average NSR of ~USD600/t for 4QFY25.
* Alumina prices are expected to trend between USD450-500/t in the coming months. Additionally, any potential shutdown of aluminum smelters (due to lower LME aluminum prices) could further reduce alumina demand and pricing.
* Management targets strengthening its coal security with 50% captive coal use, leading to cost reduction.
* Management’s capex guidance for FY25 is INR20b, which will be primarily used for the 5th Stream Alumina refinery expansion of INR17b, with the remainder allocated for maintenance, coal block ramp-up, and auxiliary projects.
* ~70% of the physical progress has been completed for the 1mtpa 5th stream alumina refinery expansion, with a target to commission by Dec’25 and an expected output of 700-800kt in FY27E.
* The Pottangi Bauxite Mines Expansion will produce 3.5mtpa of bauxite to feed the refinery expansion. The mines have reserves of 120mt, with an expected lifespan of 15-20 years. Tendering for the MDO is in progress, and production is expected to start from 3QFY26.
Valuation and view
* NALCO reported strong performance in 3QFY25, supported by strong metal prices and increased captive coal usage. With limited production headroom, alumina prices will play a vital role in the near-term operating performance.
* Management has shared a cautious view on both alumina and aluminum prices, which are expected to soften amid improving global supply, while US tariffs on aluminum imports may create market uncertainties.
* In the long run, NALCO’s aggressive expansion plans with a total capex of INR300b could significantly enhance production capacity. However, the completion timeline by FY30, execution risks, and cost escalations remain key concerns.
* Despite strong fundamentals, zero debt, and a robust demand outlook for aluminum in India, the near-term upside is capped by potential price corrections in alumina, limited production headroom, on-time execution challenges, and regulatory risks.
* At CMP, NACL trades at 5.4x on EV/EBITDA and 1.5x on P/B, and the stock is largely priced in at current levels. We reiterate our NEUTRAL rating on the stock with a revised TP of INR200, valuing it at 6x FY27 EV/EBITDA.
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