Nalco: Retains its sheen - Buy

Expansion plans and focus on backward integration should pay off

Despite protectionist trade policies and trade wars initiated by a few major economies, the global outlook for aluminium and its essential raw material, alumina, is positive. National Aluminium Company (Nalco), a Central PSU engaged in making and selling alumina and aluminium, is poised to capitalise on the growth demand for these globally.

With increasing demand for alumina, the company’s various expansion projects and focus on backward integration, Nalco’s prospects look impressive.

Financially too, stable operating profit margins and the company’s debt-free status are positives.

 

 

At the current market price of ₹69, the stock is reasonably valued at about 10 times its trailing 12-month earnings, lower than what it traded at on an average over the past three years (17 times). Long-term investors can consider buying this stock at these levels.

Nalco’s dividend yield has been healthy, at about 4-7 per cent over the past few years.

Growing alumina segment

Nalco, one of the lowest-cost producers of alumina globally, has produced 2.1 million tonnes per annum (mtpa) of alumina in FY18, which represents 34 per cent of the total production in the country.

Sales of alumina (after captive use for producing aluminium), most of which is exported, has contributed nearly 33 per cent to the total revenue of the company in FY18. It is highly profitable, with operating margins at around 48 per cent. In fact, this is the only segment contributing significantly to the company’s bottom-line as the aluminium business has been making losses over the past few years.

The company expects to benefit from the rising prices of alumina, which spiked by about 56 per cent in the last one year. Going ahead too, alumina prices are likely to be supportive, as supply concerns persist in the global market. Demand for alumina is also expected to increase by 4.3 per cent Y-o-Y in 2018 calender year.

The company is in the process of setting up the fifth stream of 1 mtpa production capacity in its alumina refinery plant with existing installed capacity of 2.275 mtpa. This is expected to be commissioned by April 2021.

Downward integration

The company has an installed capacity of 2.275 mtpa in its alumina refinery plant and 0.46 mtpa of aluminium smelter capability located at Odisha.

 

 

 

Nalco’s aluminium business has been making losses on account of higher transportation cost of alumina (key input) and rising prices of other raw materials. In addition to cost-reduction measures, the company is focusing on backward integration and has made considerable capex on the raw material projects.

Further, the company is envisaging aluminium downstream projects such as an alloy wheel plant and a value-added rolled products plant to improve realisations and insulate them from LME prices. The company has targeted a capex of ₹1,100 crore for FY19.

Stable financials

Nalco has recorded a robust growth rate of 20 per cent in revenues in FY18 on account of increased realisations from alumina and aluminium. Alumina and aluminium revenues have grown by 23 per cent and 18 per cent, respectively, from the previous year.

The net profit for the year doubled to ₹1,342 crore, aided by the strong performance of the alumina segment. In terms of profit at the operating level, there has been significant improvement. While the alumina segment’s profit grew by a strong 55 per cent Y-o-Y, the aluminium segment’s deteriorated by 63 per cent Y-o-Y on account of higher costs.

That said, the company’s overall operating margin has been stable at around 14 per cent over the past few years.

FY19 has started on a strong note, with first quarter revenue growing by 55 per cent Y-o-Y and operating margin coming in at a healthy 34 per cent.

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