Nalco- A State owned Government Gem

Cmp – 50
Market Cap – 9450 cr
Target- 100
Potential Return-100%
Industry- Aluminium and Aluminium Products



Company Overview

NALCO was established in 1981, started production in 1987, and was listed in 1992. The company has been given “Navratna” status by the government, which gives it a significant amount of autonomy in areas such as capital expenditure and investment in joint ventures and subsidiaries.

National Aluminum Company (NALCO) is India’s third-largest aluminum producer. NALCO is one of India’s leading aluminum producers; it’s a fully integrated company, mining bauxite, refining it to produce alumina and, in turn, aluminum.

The company uses all the bauxite it mines internally as well about 40% of the alumina. It sells the rest of the alumina and 100% of its aluminium products.  Most of the alumina is sold internationally, while aluminium sales are split between the domestic market (80%) and overseas (20%)

NALCO is long on alumina, producing more than twice its internal needs for aluminium smelting. The majority of the balance is sold at alumina spot prices and exported through short-term contracts



Capacity

Bauxite – 7.1 mt (Existing) ; 3 mt (Implementing)

Alumina – 2.3 mt (Existing) ; 1 mt (Implementing)

Aluminium – 0.42 mt (Existing) ;  1.38 mt (Implementing)

Aluminium semis – 50 kt rolled products (Existing) ; 60 kt rolled products (Implementing)



Revenue split

In FY18 NALCO earned 65% of its revenue from aluminium and 35% from alumina, but 116% of

EBITDA came from alumina operations  

Consolidated EBITDA increased 55% to INR17b. Alumina remains the key driver of EBITDA



Costs

Nalco has advantage of captive bauxite mines, coal linkage and logistics due to strategic locations. However, its wage bill keeps growing unfettered every year without corresponding improvement in productivity. Employee wages now account for more than USD500/t in metal CoP (cost of production), which is the highest in the world



Capex

In January 2017, NALCO released its corporate plan, comprising a 3-year action plan, 7-year strategy to FY24, and 15-year vision to FY32.

Company plans to invest INR70bn to expand alumina volumes at its refinery. Increasing the production of alumina, which is highly profitable, by about 50%, as alumina prices are now high, with strong margins is scheduled to be operational in FY22. 

The expansion of NALCO’s Damanjodi alumina refinery is expected to increase annual production capacity from 2.1mt to 3.1mt

Company also plans to cut aluminum production costs by developing two coal mines for which It is developing mines at Utkal D and E which will come on line in in 3Q FY20 and FY23, respectively.  



Industry Overview & Outlook

Trade tensions – trade tensions between the US and China may have a spill-over effect on India. China has imposed higher duties on US scrap, so part of this business may be redirected to India.

Aluminium – Over the past two years, the aluminium supply overhang has eased considerably. China has focused on supply-side reforms and elsewhere in the world there’s been a deficit

Alumina – The price of alumina had risen sharply last year, mainly because the giant Alunorte refinery in northern Brazil had been forced to cut production due to environmental problems. The alumina price rally is set to reverse this year as the Alunorte refinery returns to full production. With global production expected to increase as more alumina projects are completed, the alumina market will return to surplus in FY20e, with the price easing



Attractive Valuations

Company has a market cap of 9,400 cr and cash and cash equivalents of 3,000 cr. Net Enterprise Value comes to 6,850 cr.

At an expected EBITDA of 3300 cr in FY19, EV/EBIDTA of 2.12 times, NALCO at CMP is trading at attractive valuation. Dividend yield of 7.5% offers great comfort on the downside.

In good times, Metal sector generally can command a EV/EBIDTA of 5-6 times.  There is a strong correlation between the stock’s performance and aluminum and alumina prices.



Financial Performance

Revenue Analysis

Balance Sheet

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