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Nalco 3QFY2013 performance highlights and results update

Contributed by Angel Broking

For 3QFY2013, Nalco reported a better-than-expected PAT performance, although the top-line was in line with our estimates. We recommend Reduce rating on the stock due to its expensive valuation.

Muted top-line performance: Nalco’s net sales grew by 16.8% yoy to Rs.1,670cr (in line our estimate of Rs.1,657cr). Its aluminium sales volumes grew 4.1% yoy to 102,000 tonne while alumina production increased by 35.0% yoy to 220,000 tonne.

Higher input and energy costs hit margins: Nalco’s power costs as a percentage of net sales stood at 35.0%, ie above our estimate, due to higher-than-expected proportion of linkage coal from Mahanadi Coalfields (80%). Hence, Nalco’s profitability was above our estimates. Nalco reported an EBITDA and PAT growth of 166.6% and 132.0% yoy, respectively.

Update on Utkal coal block: Currently, there is no clarity on land acquisition for the coal block. While Nalco expects to commence production from this mine by the end of CY2013, our recent experience suggests that it could take a much longer time to acquire land and sign the mining lease with the state government.

Outlook and valuation: Although Nalco has captive bauxite mines, the cost of aluminium production remains very high on account of high power costs. Further, there is lack of clarity over the company’s future expansion plans. At the CMP, Nalco is trading at valuations of 10.7x FY2013E and 7.3x FY2014E EV/EBITDA, ie at a significant premium to its peers. Hence, valuing the stock at 6.5x FY2014E EV/EBITDA, we derive a target price of Rs.46 and recommend Reduce on the stock.