More shine to National Aluminium Company

Coal block allocation, more supplies by Coal India, and rebound in base metal prices to boost profits

The share price of National Aluminium Company (Nalco) has surged 30 per cent after it hit an almost two-year low of Rs 28 on August 25, following a rout in metal stocks on concerns over Chinese slowdown. Though China still remains a concern, analysts say current aluminium prices are factoring in too much pessimism, and ignoring fundamentals, and hence should rebound. Further, for Nalco, the good news is allocation of Utkal D and E coal blocks in Odisha.

The Utkal E block was held by Nalco since 2004, and the company had spent Rs 126 crore on its development (including Rs 98 crore on compensation for land acquisition). The block had got de-allocated following a Supreme Court order. Thus, its re-allocation, along with another block, is a positive for Nalco, and will help contain costs.

Subdued coal prices and higher supplies by Coal India will benefit Nalco. The company had been operating its smelter at low utilisations (about 65 per cent), and its plans to ramp up production on easing domestic supply of coal would enable better fixed cost recovery even at low metal prices, say analysts at Motilal Oswal.

  London Metal Exchange aluminium prices, which had fallen 25 per cent in a year to $1,525 a tonne, are up at $1,550 a tonne. Analysts at Centrum Broking say current depressed levels in aluminium are driven by speculation and unfavourable currency movements. They add prices ignore the support of the global cost curve, which makes a third of the global capacity unviable and is triggering sharp supply cuts.

In light of the supply cuts, aluminium prices (including premiums) are seen rising close to $2,000 a tonne levels in a few quarters. Centrum’s analysts point to a study on price trends, which shows after a large fall, a rebound occurs in six to nine months.

For Nalco, easing coal supplies, with stable-to-improving prices, should be good. But the strength is low-cost alumina production, and alumina prices are relatively stable. Analysts at Antique Stock Broking say given its long alumina position, with alumina pricing outlook relatively firm, they remain positive on Nalco. Analysts at Motilal Oswal, after cutting aluminium price estimates to $1,710 and $1,750 a tonne for FY16 and FY17, respectively, and cutting Nalco’s Ebitda (earnings before interest, taxes, depreciation, and amortisation) estimates by 27 per cent and 35 per cent for FY16 and FY17, respectively, have lowered their target price to Rs 54.

Analysts at Antique have a target price of Rs 48. According to 15 analysts polled by Bloomberg since August 1, the average target price is Rs 43 (upside of 19 per cent). Of the 15, nine have a buy, three sell, and three neutral ratings on the stock.