Coal concerns mar Nalco's prospects

The share price of Nalco has risen almost 40% from its 10-year low of Rs 24.10 seen on August 6th, 2013

Gains from weak rupee would get capped for the integrated aluminium producer that continues to see lumpiness in profitability due to disruption in coal supplies, which is likely to continue till its Utkal coal block starts producing in end-2014

The share price of National Aluminium Company or Nalco has risen almost 40% from its 10-year low of Rs 24.10 seen on August 6th, 2013 to Rs 33.7 on the back of a rise in global aluminium price, which though is up marginally, and weak rupee that props up realisations. As compared to average price of $1,767 a tonne in July, LME aluminium price was up at $1,814 in August. Currently, the same is around $1,780 levels. Since end-July, rupee is also down 12% versus the dollar. Operationally, Nalco is targeting to increase alumina output by 20% in FY14. It also expects to export a larger quantity of alumina and aluminium this year. However, the overall gains from these for Nalco would get capped given the continuing issue it faces with respect to coal supplies, which is hurting its production and profitability.

The varying linkage coal availability has led to volatility in Nalco’s profitability in the past also. The company that had been forced to shut 120 of its 930 pots (at its smelter) due to non-availability of coal during the September 2011 quarter was once again forced to shut 198 pots out of 960 in the June 2013 quarter. Thus, for June quarter, aluminium production at 85,000 tonnes was down by 17.5% year-on-year.

Due to lower supplies from Coal India’s Bharatpur mine, Nalco had to use e-auction coal to the tune of around 5% of its requirements and imported coal to the tune of 6% in the June 2013 quarter, which saw power and fuel costs surge 62.5% sequentially. With linkage coal supplies being hit and looking at the Coal India’s commitment to the power sector, the situation on coal linkage may not improve soon, believe analysts. Most of them don’t see the pots restarting soon and owe the lower management guidance of aluminium output during the FY14 at 300,000-320,000 tonnes against 400,000 tonnes in FY13, to the same.

Analysts at Kotak Institutional equities, in a report last month, said the shutdown will increase overall cost pressure due to apportioning of fixed costs on lower volumes, which was also visible in June quarter. Post June quarter results in mid-August, analysts like Giriraj Daga at Nirmal Bang, had revised their Ebitda estimates downward by 20% and 25% for FY14 and FY15, respectively, due to a rise in his cost assumptions.

The company’s Utkal coal block, which is expected to provide respite, is also expected to start production only in late-2014. In this backdrop, analysts don’t see further gains for Nalco’s stock, whose consensus target price is Rs 32.