Expansion of alumina capacity will support growth, but profits will take a hit if aluminium prices fall significantly
The recent news about National Aluminium Company (Nalco) receiving approval to mine coal in its Orissa block saw the stock rise almost 16 per cent from a 52-week low on Friday (August 19). Though it has given up some ground thereafter, the development is positive and improves the company’s coal security for future expansion projects, besides cost savings.
Since early 2011, Coal India had raised prices by a little over 30 per cent, which had led analysts to significantly downgrade Nalco’s earnings for 2011-12, as well as 2012-13. The move was logical, as the company procures almost 90 per cent of its requirement (used in generating power, for producing aluminium) from entities like Coal India. The approval to mine coal, hence, signals that things should change for the better.
The company’s management expects to mine about two million tonnes of coal every year from the Orissa block, which has about 70 mt of reserves. “The approval for the coal mine is positive, given that this will provide the company integration for its future capacity,” says Ravindra Deshpande, who tracks the metals sector at research firm Elara Capital.
| VOLUME BOOST | ||
| Rs crore | FY11 | FY12E |
| Total income | 5,959 | 7,318 |
| Ebitda | 1,492 | 2,186 |
| Change (%) | 49.8 | 46.5 |
| Ebitda (%) | 25.0 | 29.9 |
| Net profit | 1,073 | 1,561 |
| Change (%) | 31.8 | 45.4 |
| Net margin (%) | 16.7 | 19.9 |
| PE (x) | 15.7 | 10.8 |
| P/BV (x) | 1.5 | 1.3 |
| RoE (%) | 10.0 | 13.1 |
| E: Estimates Source: Standard Chartered Research | ||
At Rs 63.90, the stock is trading near its fair value of about Rs 73-75. Hence, analysts do not see much downside, unless aluminium prices fall significantly from current levels.
VOLUMES TO SUPPORT GROWTH
Nalco is the second largest company in the domestic aluminium industry. It has been a key beneficiary of the rising international aluminium and alumina prices. However, most of its growth in recent quarters has come due to the increase in realisation, whereas volumes have been stagnant. The pressure on Nalco’s margins, though, has remained, largely due to higher cost of production and employee expenses. Going forward as well, although there would not be much change in aluminium volumes (almost 80 per cent of the revenue) in the absence of the new capacities and utilisation at over 80 per cent, overall revenue growth will be mainly led by higher volumes in the alumina business.
In the current and next financial years, the completion of alumina capacity expansion (alumina accounts for about a fifth of Nalco’s revenue) from 1.5 mt to 2.1 mt in the first quarter of 2011-12 would drive overall growth in revenues. By analysts’ estimates, a 50 per cent growth in alumina volumes and 10 per cent increase in alumina prices at about Rs 420-450 per tonne in 2011-12 would help the company grow its alumina business by 60-70 per cent. This will lead to overall revenue growth of a little over 20 per cent and help improve margins over the next two years.
REALISATIONS, KEY TO PROFITS
However, since aluminium still accounts for about 80 per cent of revenues, investors will need to keep a close eye on international aluminium prices. In fact, these have already corrected to $2,320 per tonne, as against the average price of $2,600 per tonne in the June quarter and about $2,450-2,500 per tonne estimated by analysts in 2011-12. A further correction in international prices could impact the company’s earnings, given the high sensitivity.
Also, the pressure on the margins needs to be monitored ,as the company’s cost of producing aluminium has gone up from $1,572 per tonne in 2009-10 to $1,829 per tonne in 2010-11 and further to $1,975 per tonne in the June quarter. So far, the company has been able to absorb input cost pressures because of increasing realisations. For the quarter ended June, the company reported a 50 per cent jump in alumina prices and about 28 per cent increase in aluminium realisations.
However, the going could get tough if aluminium prices buckle under pressure.
