Neutral NALCO Ltd for the Target Rs. 190 by Motilal Oswal Financial Services Ltd
Soft metal prices and muted volume drag down operational performance
* 1QFY26 revenue stood at INR38.1b (+33% YoY and -28% QoQ) against our est. of INR43.2b, driven by a softening in alumina prices and muted volumes.
* Consol. EBITDA came in at INR14.9b (+60% YoY and -46% QoQ) against our est. of INR16.8b amid muted NSR and sustained costs. EBITDA margin stood at 39.2% vs. 32.7% in 1QFY25 and 52.3% in 4QFY25.
* APAT was INR10.5b (+78% YoY and -49% QoQ), in line with our est. of INR10.9b, supported by lower finance costs and higher other income.
* The board recommended a final dividend of INR2.5 per share (~50% of the face value) in FY25.
Aluminum business
* Revenue from the aluminum business stood at INR27.2b, rising 7% YoY but declining 14% QoQ during the quarter.
* Metal production stood at 115kt (+3% YoY and -3% QoQ), while sales volume was at 113kt (+9% YoY and -10% QoQ) during the quarter.
* EBIT for the vertical stood at INR9b, up 11% YoY but down 37% QoQ.
Chemical (Alumina) business
* Revenue from the chemical business stood at INR16.3b, up 91% YoY but down 36% QoQ, led by a softening in alumina prices and muted volume.
* Alumina Hydrate production declined 1% QoQ to 578kt (+28% YoY), while alumina sales volume fell 12% QoQ to 304kt (+49% YoY) due to muted export volume.
* Export volume declined by 17% QoQ to 275kt (vs. 334/90kt in 4Q/1QFY25), and domestic volume stood at 29kt (vs. 12.4/9.8kt in 4Q/1QFY25).
* EBIT declined 62% QoQ to INR5b (vs. INR311m in 1QFY25).
Key highlights from the management commentary
* Management guided that alumina export volume is expected to increase to ~1,200-1,280kt in FY26 vs. 1,064kt in FY25, as the company plans to grow alumina shipments from 36 in FY25 to over 40 in FY26.
* Export share is likely to remain 80% of total alumina sales, while the remaining 20% will be supplied in domestic market.
* In 1QFY26, NACL achieved an average alumina realization of USD416/t, despite spot prices moderating to ~USD400/t. Management expects spot prices to remain in the range of USD400-450/t in the coming quarters.
* NACL expects the alumina CoP to remain stable or slightly improve in FY26 on account of continued optimization efforts.
Valuation and view
* NACL reported sequential weak performance during the quarter, led by softened alumina/aluminum prices and muted volume. With limited production headroom, alumina prices are vital for near-term operating performance.
* In the long run, NACL’s planned an expansion with a total capex of INR300b could significantly enhance production capacity. However, with the completion timeline of 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, US trade tension, on-time execution challenges, and regulatory risks.
* At CMP, NACL trades at 4.3x on EV/EBITDA and 2.1x on P/B. We reiterate our Neutral rating on the stock with a TP of INR190, valuing it at 4.5x EV/EBITDA on FY27E.
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