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National Aluminium 1QFY2010 performance highlights and result update

Contributed by Angel Broking

By Angel Broking

National Aluminium’s (Nalco) 1QFY2011 net revenue came in at Rs1,292cr, below our estimates of Rs1,459cr. However, net profit at Rs284cr was in line with our estimates of Rs279cr.

1QFY2011 results no different: Nalco’s net revenue increased by 40.2% yoy to Rs1,292cr, mainly driven by higher realizations and increased sales volumes. During the quarter, while aluminium production increased by 6.6% yoy to 111,663 tonnes, sales volume was higher by 16.7% yoy to 108,620 tonnes (93,104 tonnes in 1QFY2010). During the quarter, the aluminium segment reported revenue growth of 49.1% yoy to Rs1,121cr and the chemical segment reported revenue growth of 15.3% yoy to Rs403cr. However, the company’s energy segment reported a 25.1% yoy decline in revenue to Rs360cr despite power generation increasing to 1,659mn units (1,600mn units). EBITDA margin expanded by 1,233bp yoy to 30.5%. This was mainly due to decline in a) rawmaterial cost (as a % of net sales), from 13.6% in 1QFY2010 to 7.3% in 1QFY2011; b) power cost (as a % of net sales) from 30.9% in 1QFY2010 to 28.6% in 1QFY2011; and c) staff cost (as a % of net sales) 18.3% in 1QFY2010 to 16.9% in 1QFY2011. Consequently, EBITDA grew by 135.4% yoy to  s394cr. The effective tax rate for the quarter declined to 27.5% (as compared to 34.1% in 1QFY2010). As a result, net profit increased by 124.8% yoy to Rs284cr.

Outlook and valuation: Nalco continues to trade at rich valuations of 15.5x FY2011E and 12.1x FY2012E EV/EBITDA, as compared to its peers Hindalco and Sterlite, which are trading in a band of 4–6x FY2011E and FY2012E EV/EBITDA. We maintain a Sell rating on Nalco with a Target Price of Rs316.

Result highlights

Nalco’s net revenue increased by 40.2% yoy to Rs1,292cr in 1QFY2011. Growth was mainly driven by higher realisations and increased sales volumes.

The company’s aluminium production increased by 6.6% yoy to 111,663 tonnes. Sales volume was higher by 16.7% yoy to 108,620 tonnes (93,104 tonnes in 1QFY2010) during the quarter.

During the quarter, the aluminium segment reported revenue growth of 49.1% yoy to Rs1,121cr and the chemical segment reported revenue growth of 15.3% yoy to Rs403cr. However, the company’s energy segment reported a 25.1% yoy decline in revenue to Rs360cr despite power generation increasing to 1,659mn units (1,600mn units) due to change in transfer pricing mechanism.

During the quarter, Nalco’s EBITDA margin expanded by 1,233bp yoy to 30.5%. This was mainly due to decline in a) raw-material cost (as a % of net sales), from 13.6% in 1QFY2010 to 7.3% in 1QFY2011; b) power cost (as a % of net sales) from 30.9% in 1QFY2010 to 28.6% in 1QFY2011; and c) staff cost (as a % of net sales) 18.3% in 1QFY2010 to 16.9% in 1QFY2011. Consequently, EBITDA grew by 135.4% yoy to Rs394cr. The effective tax rate for the quarter declined to 27.5% (as compared to 34.1% in 1QFY2010). As a result, net profit increased by 124.8% yoy to Rs284cr.

Investment rationale

Coal supply issues likely to continue

Nalco has been facing coal supply issues, which have disrupted its operations in the past. The company sources its annual coal requirement from Mahanadi Coalfields Ltd., but the supply is not evenly distributed. In our view, any disturbance in coal supply would increase the company’s dependence on imported or external coal, thereby negatively affecting margins.

Limited growth visibility

Apart from the ongoing expansion plan, there is little clarity on the other proposed expansion plans as they are in various stages of financial closure and significant progress is yet to be made.

Outlook and valuation

At the CMP of Rs424, Nalco is trading at rich valuations of 15.5x FY2011E and 12.1x FY2012E EV/EBITDA, as compared to its peers Hindalco and Sterlite, which are trading in a band of 4–6x FY2011E and FY2012E EV/EBITDA. Moreover, the government holds an 87.2% stake and plans to divest up to 10% as per media reports. We believe the disinvestment is unlikely to happen at the current price level on account of expensive valuations and the stock may potentially correct down as seen in the recent FPOs. We maintain a Sell rating on the stock with a Target Price of Rs316.