Nalco-InitiatingCoverage.pdf - Axis Direct

Initiating Coverage

23rd Feb, 2022

BUY

Target Price

150

NALCO

Metals & Mining

1

Well placed to benefit from the strong Aluminum prices

We initiate coverage on National Aluminium Company (Nalco) with a BUY recommendation and a Target Price of Rs 150, implying a 28% upside from the current levels. Nalco is the only pure equity play on Aluminium and Alumina commodities in India. Aluminium is expected to remain in a deficit a second consecutive time in CY22 supporting higher prices. The recent geopolitical tension in Europe has pushed prices to a 13 year high level above $3,300/t and Nalco is well placed to benefit from the higher prices. In response towards a robust Aluminum prices outlook, Nalco has started optimising its Aluminium production by targeting 100% utilisation of its 460ktpa smelter. In Q3FY22, the company produced a record level of production of 115kt (annualises to 460ktpa), highest in its history and has operationalised its entire potroom (all the 960 pots are under operation now) to capitalise on the high Aluminium prices.

Aluminum margins jump to higher level

Historically, Alumina contributed higher EBITDA, on an average ~70% over the last decade (FY12-21), while the Aluminium and wind power/other segment contributed the remaining 20% and 10% EBITDA respectively. With a high grade captive Bauxite mine, Nalco is already in the first quartile of the Alumina cost curve, while its high fixed costs have pushed the Aluminium smelter at the top end of the cost curve. However, since March 2021, with the rise in Aluminium prices, the EBIT/tonne of Aluminium has increased substantially (9MFY22 EBIT/tonne at ~$790/tonne vs $126/tonne in 9MFY21). Each tonne of Aluminium sale is generating $560/tonne higher EBIT/tonne than two tonnes of Alumina.

Higher earnings to fund growth capex and higher dividend

With higher Aluminium prices, we forecast revenue/EBITDA/PAT CAGR of 23%/56%/50% over FY21-23E, and YoY growth of 1.4%/1.8%/1.8% on FY22E/23E. With higher profitability, the company would be able to fund its growth capex from the internal earnings, with positive FCF post the growth capex, the company could sustain payout ratio of 50% translating into an attractive dividend yield of 9% and 7% in FY22E/23E.

Expansion projects benefit to accrue post FY24

Nalco is expanding its Alumina refinery capacity by 1mtpa, the project is expected to start by Q3FY24. The company has been allotted coal blocks – Utkal D and E of 2 mtpa each. The coal block could reduce the power cost by replacing the e-auction coal going forward, however due to delays, the coal mining is expected to start only from FY24 in a phased manner. The Caustic soda JV is expected to start from FY23. We don’t model incremental Alumina volumes from the Alumina refinery expansion in FY24.

Aluminum – supply concerns drive multi-year higher prices.

In 2022, the Aluminium market is likely to be in a deficit of ~1.4Mnt a second consecutive time (2021 deficit of ~0.9Mnt). China’s decarbonisation policy is impacting the Chinese supply and would drive the deficits in coming years. China is expected to remain in primary aluminum structural deficit (~1-2 Mtpa) in 2022. In Europe, the higher power prices led to curtailment of smelting capacity (~15% of total European capacity). The Russia Ukraine crisis and possible supply sanctions on Rusal (Rusal’s 40% revenue is from European shipments) has led the LME spot to rise to a historical high level of $3,300/tonne. With supply disruptions and strong underlying demand the LME and SHFE stocks are on a declining trend. The aluminium market will remain sensitive to supply shocks as a result of historically low stocks of the metal.

Valuation & Recommendation

We initiate coverage with a BUY rating and value the company at 5.5x FY24 EBITDA and 0.5x book value of CWIP to arrive at the target price of Rs 150/share, implying an upside potential of

28% from the current levels.

Key Financials (Consolidated)

(Rs Cr) FY 21A FY 22E FY 23E FY 24E

Net Sales 8,956 13,345 13,528 13,591

EBITDA 1,783 4,265 4,343 4,373

Net Profit 1,299 2,885 2,938 2,902

EPS (Rs.) 7.0 15.7 16.0 15.8

PER (x) 5.1 5.6 7.3 7.4

P/BV (x) 0.6 1.3 1.5 1.4

EV/EBITDA (x) 2.8 3.4 4.5 4.4

ROE (%) 0.1 0.2 0.2 0.2

Source: company, Axis Research

CMP as of 23rd Feb, 2022

CMP (Rs) 117

Upside /Downside (%) 28%

High/Low (Rs) 128/50

Market cap (Cr) 21,148

Avg. daily vol. (6m) Shrs. 3,47,95,776

No. of shares (Cr) 183

Shareholding (%)

Jun-21 Sep-21 Dec-21

Promoter 51.28 51.28 51.28

FIIs 8.64 15.22 13.30

MFs / UTI 10.98 10.01 10.12

Banks / FIs 0.42 0.30 0.24

Others 28.68 23.19 25.06

Financial & Valuations

Y/E Mar (Rs) FY22E FY23E FY24E

Net Sales 13,345 13,528 13,591

EBITDA 4,265 4,343 4,373

Net Profit 2,885 2,938 2,902

EPS (Rs) 15.7 16.0 15.8

PER (x) 5.6 7.3 7.4

P/BV (x) 1.3 1.5 1.4

EV/EBITDA (x) 3.4 4.5 4.4

ROE (%) 0.2 0.2 0.2

Key Drivers (%) (Growth in %)

Y/E Mar FY22E FY23E FY24E

Net Sales 49 1 0

EBITDA 139 2 1

Net Profit 122 2 (1)

Axis vs. Consensus

EPS Estimates FY22E FY23E FY24E

Axis 15.7 16.0 15.8

Consensus n/a n/a n/a

Mean Consensus TP (12M) 133

Relative performance

Source: Capitaline, Axis Securities

25

125

225

325

Jan-20 Jul-20 Jan-21 Jul-21 Jan-22

Natl. Aluminium BSE Sensex

Aditya Welekar Research Analyst Email: [email protected]

2

Financial Story in Charts

Exhibit 1: Optimizing Aluminum production (kt) Exhibit 2: Alumina production and sales (kt)

Source: Company, Axis Securities

Exhibit 3: Higher Aluminum prices to drive revenue growth Exhibit 4: Higher prices to drive jump in EBITDA %

Source: Company, Axis Securities Exhibit 5: PAT to grow driven by higher EBITDA Exhibit 6: Improving ROE and ROCE


Exhibit 7: FCF post growth capex to remain positive Exhibit 8: Attractive EV/EBITDA in FY22E/23E


387 426

440

418

418 455

446

443

386 426

441

396

423

440

439

443

FY-17 FY-18 FY-19 FY-20 FY-21 FY-22E FY-23E FY-24E

Aluminium Production Aluminium Sales

2,1

00

2,1

06

2,1

53

2,1

61

2,0

85

2,0

45

2,0

48

2,0

37

1,2

95

1,3

37

1,3

18

1,3

04

1,2

28

1,2

60

1,2

18

1,2

22


Alumina Production Alumina Sales

7,5

43

9,6

18

11,4

99

8,4

72

8,9

56

13,3

45

13,5

28

13,5

91

28%20%

-26%

6%

49%

1% 0%

-40%

-20%

0%

20%

40%

60%

-

5,000

10,000

15,000

Revenue Revenue growth %

1,0

80

1,3

97

2,8

93

489

1,7

83

4,2

65

4,3

43

4,3

73

14% 15%

25%

6%

20%

32% 32% 32%

0%

10%

20%

30%

40%

-

1,000

2,000

3,000

4,000

5,000

EBITDA EBITDA Margin %

668

1,3

42

1,7

34

136

1,2

99

2,8

85

2,9

38

2,9

02 9%

14% 15%

2%

15%

22% 22% 21%

0%

5%

10%

15%

20%

25%

-

1,000

2,000

3,000

4,000

PAT PAT Margin %

0.1

3

0.1

7

0.0

1

0.1

3

0.2

5

0.2

2

0.2

0

0.0

7

0.1

8

(0.0

0)

0.0

9

0.2

6

0.2

3

0.2

1

FY-18 FY-19 FY-20 FY-21 FY-22E FY-23E FY-24E

ROE ROCE

1,847 2,044 2,037 1,752 1,805

2,700 2,767 2,789

-

500

1,000

1,500

2,000

2,500

3,000

(2,000)

(1,000)

-

1,000

2,000

3,000

4,000

Net Cash FCF Capex LME Aluminium

5.8

x

5.6

x

2.3

x

10.9

x

2.8

x

3.4

x

4.6

x

4.5

x

12.8

x

7.9

x

5.7

x

5.1

x

5.6

x

7.5

x

7.6

x

-

5.00

10.00

15.00

20.00

EV/Ebitda (x) PER (x)

3

Company Overview

National Aluminum Company Limited (Nalco), a Navaratna Central Public Sector Unit of Govt. of India, is one of

the largest Integrated Alumina and Aluminum Complex in Asia. Nalco’s presence encompasses the entire value

chain from bauxite mining, alumina refining, aluminum smelting, power generation to downstream products.

Integrated mining complex: Nalco has its own Bauxite mines (6,825ktpa capacity), Alumina refinery

(2,275ktpa), and aluminum smelter (460ktpa) with a captive power plant of 1,200MW along with bulk

shipment facilities at Vizag port for export of alumina/aluminum and import of caustic soda.

Captive Bauxite mine: Nalco’s Bauxite reserves are located at Panchpatmali hills at Damanjodi, in

Odisha. The fully mechanized open cast bauxite mine, which has been in operation since 1985, has good

ore quality with high percentage of Alumina (45%) and low percentage of Silica (3%). After mining the

crushed ore is transported by a single light multi curve fully covered cable belt conveyor over a distance

of 14.6 Km to the Alumina Refinery unit situated at the foothill of the mines, thereby providing logistics

advantage. As per IBM guideline, for Bauxite miners, earlier up to 4% silica content in bauxite was

processed but now it is mandatory to process bauxite up to 7% silica content, this has resulted in higher

reserves, but higher costs due to higher caustic soda requirement to process high silica content.

Alumina in 1st quartile of the cost curve: The Alumina refinery is located in proximity near the foothill

of the Panchpatmali hills, ~14Km from mines, with captive bauxite and good Mineralogy, logistics

advantage, the Alumina refinery is amongst the lowest cost producers globally. The Alumina is

transported by rail to the smelter at Angul, and excess alumina is sold mainly through exports via Vizag

port. Company has captive SPP 5X18.5MW for the refinery and receives 35MW from the CPP.

Smelter with captive power: The 460ktpa Aluminum smelter has captive power from 1,200MW CPP.

The CPP requires 6.6mtpa coal, the company has Fuel supply agreement (FSA) for 4.716mtpa and

0.89mtpa bridge linkage with Mahanadi coalfields Ltd (MCL), and balance shortfall is sourced through e-

auction route.

Alumina long position: Nalco is net Alumina long. In FY21, the Alumina exports contributed 28% of

Revenue, In FY21 the company exported higher aluminum ~29% of total sales, against previous 4 years

range of 9-15%. Company is going for short-term contracts for alumina sales given higher spot prices.

Volume growth and raw material securitization projects: Nalco has consistently operated on 460ktpa

and 2,275ktpa Aluminium and Alumina capacity. To envisage volume growth, the company is setting up

5th stream in its existing Alumina refinery, which will expand the capacity by 1mtpa (expected completion

by Q3FY24). The Bauxite needed for the additional alumina will be sourced from the South block of

Panchpatmali mines, until the dedicated pottangi mines for the expansion are ready to operate (Likely to

start by Q4FY24). Company was allotted Utkal-D and Utkal-E Coal Blocks (2 mtpa capacity each with

175MnT reserves) as a part of raw material security to the existing Units of CPP and for future expansion

projects. Utkal-D has received all the statutory clearances; company expects to start mining in phased

manner with capacity ramping up 0.5/1.5/2.5/4mtpa over FY24/FY25/FY26/FY27.

Exhibit 9: FY21 Revenue split Exhibit 10: Revenue by geography

Source: Company

39%

29%

28%

2%1% 1%

Aluminium Domestic

Aluminium Exports

Alumina Exports

Alumina Domestic

Other operating income

Power

54% 57% 57% 58%42%

46% 43% 43% 42%58%

FY-17 FY-18 FY-19 FY-20 FY-21

India Outside India

Nalco operates under

three segments –

Chemical (alumina),

Aluminum and Wind

power under common

segment. Nalco has its

own Bauxite mine

(6,825ktpa capacity),

Alumina refinery

(2,275ktpa), and

aluminum smelter

(460ktpa)

4

Exhibit 11: Existing facilities

Operation Location Capacity

Bauxite Mines Panchpatmalli, Koraput, Odisha 6,825 Ktpa (North & Central Block)

3,150 Ktpa (South Block)

Alumina Refinery Damanjodi, Odisha 2,275 Ktpa

Smelter Plant Angul, Odisha 460 Ktpa

Captive Power Plant Angul, Odisha 1,200 MW For Smelter

Damanjodi, Odisha Captive SPP 5X18.5MW For Refinery

Port Facilities Visakhapatnam 1,400 Ktpa

(Alumina Export / Caustic Soda Lye Import)

Wind Power Gandikotta, A.P. 50.4 MW

Ludarva, Jaisalmer, Rajasthan 47.6 MW

Devikot, Jaisalmer, Rajasthan 50.0 MW

Sangli, Maharashtra 50.4 MW

Source: Company Exhibit 12: Expansion Projects

Expansion projects Location Capacity Remark

Utkal-D Coal block Talcher coalfield,

Odisha 2 Mtpa Coal mining expected to start from FY24

Utkal-E Coal block Talcher coalfield,

Odisha 2 Mtpa

Pre-project activities for execution of Mining Lease of Utkal-E are on

5th Stream of Alumina Refinery

Damanjodi, Odisha

1.0 mtpa [Existing capacity 2.275 mtpa, post

expansion capacity 3.275 mtpa]

Total Capex: Rs. 6,436Cr Bauxite for 5th Stream -

Prior to commissioning of Pottangi Mines: Panchpatmali Mines South Block [Capex Rs 483Cr]

Pottangi Bauxite Mines Koraput district of

Odisha Reserves: 75 Mnt, 3.5mtpa capacity

To meet the bauxite requirement of 1MnT Alumina Refinery under expansion. Expected Mining start

date: Q4FY24

25.5 MW Wind Power Project

Kayathar, Tamil Nadu

Augmenting wind power capacity to 223.90 MW by adding another wind

power project of 25.5 MW Capex Rs 163Cr

Source: Company

Other projects: Nalco has formed various JVs (details below in Exhibit 13). The Caustic soda 40% JV

with GACL is expected to start operating by mid-FY23 (delayed due to Covid), company will source 1

Lakh tonne at market prices from JV (the current requirement is 2 Lakh tonne, post Alumina refinery

expansion its 3 Lakh tonne). Nalco is exploring through a JV with MCL for a 0.5mtpa Greenfield Smelter-

cum-Power Plant in addition to the 0.5mtpa brown field expansion at the existing plant, company has not

given timelines on these projects.

Exhibit 13: Other Projects

Other projects/JVs Location Capacity Remark

Caustic Soda 40% JV with Gujarat Alkalies and Chemicals Ltd. (GACL)

Dahej, Gujarat 2.7 Lakh TPA Caustic Soda Plant

130 MW Captive Power Plant Capex Rs 276Cr

Angul Aluminum Park Pvt. Ltd. in JV (49%) with M/s. Odisha Industrial Infrastructure Development Corporation

Angul, Odisha Aluminum Park for promotion of

Aluminum downstream industries Capex Rs 16.22Cr

Completion timeline Q4FY22

High End Aluminum Alloy Plant in JV with M/s. Mishra Dhatu Nigam Ltd.

Nellore district, A.P. 60ktpa High End Aluminum Alloy Plant for

application in Defence, Aerospace and Automobile Sectors

Released Rs 20Cr so far towards JV share Commissioning date by FY 2024-25

JV with M/s. Hindustan Copper Limited and Mineral Exploration Corporation Limited

Acquisition of some strategic minerals in

overseas locations to promote “Make in India” initiative of the Government of India

Released Rs.1Cr so far towards JV share

Aluminum Downstream Projects

Dhenkanal district in Odisha

Rolled Product Unit and Foil Plant Detailed Project Report (DPR) is prepared

Commercialization of Li-Ion cell technology

Exploring to set up a Lithium-ion pilot project based on the Memorandum of

Agreement with ISRO

Source: Company

5

Higher Aluminum price realization driving higher earnings

Historically, the Alumina segment has consistently delivered positive EBITDA/tonne over the last

decade. With high grade captive Bauxite and logistics advantage Nalco’s Alumina refinery is in the 1st quartile

of the cost curve. Alumina contributed an average ~70% EBITDA over the last decade (FY12-21), while the

Aluminium and wind power segment contributed the remaining 20% and 10% EBITDA respectively. High fixed

costs keeps the Aluminium segment at the top end of the cost curve sensitive to Aluminium prices. In Q3FY22,

aluminium EBIT/tonne stood at $876/tonne vs alumina EBIT/tonne of $157/tonne. Due to elevated cost

structure, the Aluminium segment is more sensitive to price changes, 1% increase in Aluminium and Alumina

prices increases the EBITDA by 2% and 1% respectively.

Optimising Aluminium production: In view of higher Aluminium prices, the company operated 940 pots for

the first time in its history and achieved highest ever production of 115kt in Q3FY22, it sourced external power

due to shortage of coal to operate the pots. Company has four pot lines of 240 pots each; it operationalised

960th pot on 12th Jan 2022, first time in its 41 years of history. For running 960 pots, 900MW power is required,

it is sourcing 200MW from outside sources (at marginally higher cost than the cost of production) and

generating the rest from CPP. In order to get assured returns on the high LME Aluminium prices, it has made

the power sourcing arrangement, as coal shortage led Coal India to prioritise coal railway rakes for IPPs. Coal

for the power plant is sourced from coal mines located few kilometers away at Talcher coal fields by dedicated

Merry-go-round railway system. Apart from the Merry-go-round, company also used to get coal through railway

rakes. Company expects the coal supply situation to ease in Q4 as power plants build coal stocks.

Exhibit 14: Aluminum and Alumina segmental EBIT (Rs Cr) Exhibit 15: Aluminum and Alumina EBIT/tonne ($/tonne)

Source: Company Exhibit 16: Aluminum and Alumina EBITDA/tonne ($/tonne) Exhibit 17: Optimizing Aluminum production (kt)

Source: Company

(400)

(200)

-

200

400

600

800

1,000

Aluminium Chemicals

-

500

1,000

1,500

2,000

2,500

3,000

3,500

(400)

(200)

-

200

400

600

800

1,000

1Q

19

2Q

19

3Q

19

4Q

19

1Q

20

2Q

20

3Q

20

4Q

20

1Q

21

2Q

21

3Q

21

4Q

21

1Q

22

2Q

22

3Q

22

Aluminium Chemicals Aluminium Realised Prices

(100)

-

100

200

300

400

500

Aluminium Chemicals

101

101 105 1

11

112

110

111

108

111

111

110

96

102

98

106

102

112

114

114

115

85

90

95

100

105

110

115

120

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

2Q

19

3Q

19

4Q

19

1Q

20

2Q

20

3Q

20

4Q

20

1Q

21

2Q

21

3Q

21

4Q

21

1Q

22

2Q

22

3Q

22

6

Higher earnings to fund growth capex and higher dividend

Free cash flow to remain healthy: Nalco has net cash of Rs 2,314Cr as of H1FY22. The company has

positive free cash flow of Rs 1,026Cr as of FY21, and with higher earnings, the FCF would remain strong,

and the company will be FCF positive even after paying higher dividends.

FY23 capex guidance is of Rs 1,800Cr, the company’s Alumina refinery expansion capex is of Rs

6,400Cr, with higher earnings, the company is in a position to fund the capex without disturbing its cash

balance.

Exhibit 18: Free cash flow to sustain growth capex funding Exhibit 19: Dividend Yield to remain high


Dividend payout to remain high: Company’s DPS stood at Rs 3.5/sh in FY21, for FY22, the company

has declared two interim dividends of Rs 2/sh and Rs 3/sh, with a possibility of the final dividend in the

next tranche. We expect the payout ratio of 50% in FY21 to continue for FY22/FY23 given our high

earnings estimates. As per DIPAM guidelines, the dividend is to be paid minimum 5% of the net worth or

30% of the profit, whichever is higher.

Raw material inflation will persist but we expect marginal correction: In Q3FY22, cost of raw

materials increased 30% QoQ and 60% YoY. Caustic soda forms the majority of Alumina cost, in Q3 the

prices increased from a level of Rs 33,000-34,000 to Rs 75,000/tonne. Prices shot up in Q3Y22 as the

vessels carrying caustic soda to China were held up for a quarantine period of 14 days due to Covid,

distorting the supply chain. International caustic soda prices have corrected from the Dec-Jan 2022 peak,

we model marginal ease in raw material costs in Q4FY22.

The Spread between LME and 90th percentile smelter in 2021 (Ex-China) has increased, indicating

smelters in 4th quartile are able to absorb costs and still be able to make profits.

Exhibit 20: Caustic Soda Prices (US$/t) Exhibit 21: Spread between LME and 90th Percentile smelter in 2021 (World ex-China)

Source: Alumina Ltd, Norsk Hydro

-

500

1,000

1,500

2,000

2,500

3,000

(2,000)

(1,000)

-

1,000

2,000

3,000

4,000

Net Cash FCF Capex

FCF Post Dividend LME Aluminium

2.8

0

5.7

0

5.7

5

1.5

0

3.5

0

8.0

0

8.0

0

8.0

0

7.4%

10.4%11.0%

3.8%

9.9%9.1%

6.7% 6.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

-

2.00

4.00

6.00

8.00

10.00

Total DPS (Rs/sh) Dividend Yield %

7

Outlook & Valuation

Average 12MF consensus EV/EBITDA over the last 10 years for Aluminium companies ranged from 5x

to 10x, with Vedanta at 5x, Alcoa 5.4x, Rusal 9.6x, Norsk Hydro 6.1x and Hindalco at 6.4x. Nalco is

trading at 4.6x on our FY23 EBITDA estimate.

Nalco is the only equity pure play on Aluminium and Alumina prices. Company has high exposure to LME

Aluminium and Alumina as it sells Aluminium unwrought products without much value addition,

downstream processing.

With LME Aluminium at 13 year high, and Alumina prices ticking up towards $400/tonne, Nalco is best

placed to ride the tailwinds and it has correctly started optimising its Aluminium production.

We expect Aluminium prices to remain high in FY23, as metal is expected to remain in a deficit in FY23

also. China’s focus to cut carbon emissions will limit supply from the region. In RoW, considering the long

term environmental impact, renewable power based brownfield or greenfield smelters will be difficult to

come online quickly, while demand will remain strong.

We value the stock at 5.5x FY24 EBITDA estimate and 0.5x book value of CWIP to arrive at our target

price of Rs 150, an upside of 25% from CMP. We initiate the coverage of Nalco with BUY rating.

Exhibit 22: DCF Valuation Exhibit 23: Sensitivity to LME Aluminum and Alumina Prices


Nalco is highly sensitive to LME Aluminium and Alumina prices, 1% increase in the Aluminium price

increases the EBITDA by 2% and 1% increase in Alumina price increases the EBITDA by 1%.

Above (Exhibit 23) we show the impact of LME Aluminium and Alumina on the EBITDA and target price.

Exhibit 24: Aluminum comps

Source: Bloomberg, Priced as of 22nd Feb 2022.

Exhibit 25: Key Assumptions


LME Aluminum ($/t) 1,847 2,044 2,037 1,752 1,805 2,700 2,767 2,789

Alumina price ($/t) 340 365 474 306 274 341 365 354

Alumina production (kt) 2,100 2,106 2,153 2,161 2,085 2,045 2,048 2,037

Aluminum production (kt) 387 426 440 418 418 455 446 443

Alumina Sales (kt) 1,295 1,337 1,318 1,304 1,228 1,260 1,218 1,222

Aluminum sales (kt) 386 426 441 396 423 440 439 443

EBITDA (Rs Cr) 1,080 1,397 2,893 489 1,783 4,265 4,343 4,373

INR USD 67 64 70 71 74 74 75 75


Valuation Unit

EBITDA FY24E Rs Cr 4,373

Target EV/EBITDA 12MF (x) 5.5

EV FY23E Rs Cr 24,053

CWIP at FY23E (0.5x book value) Rs Cr 1,666

Net Cash FY23E Rs Cr 2,072

Equity Value FY23E Rs Cr 27,790

No of Shares Outstanding Cr 184

Target price FY23 Rs/sh 151

Target price FY23 Rounded to nearest 5 Rs/sh 150

CMP Rs/sh 117

Upside/(Downside) % 28%

LME Aluminium ($/t)

2,389 2,589 2,789 2,989 3,189 3,389

154 367 2,063 3,759 5,455 7,151 8,847

254 674 2,370 4,066 5,762 7,458 9,154

354 981 2,677 4,373 6,069 7,765 9,461

454 1,288 2,984 4,680 6,376 8,072 9,768

554 1,596 3,292 4,988 6,684 8,380 10,076 Alu

min

a (

$/t

)

LME Aluminium ($/t)

2,389 2,589 2,789 2,989 3,189 3,389

154 12 71 130 189 248 306

254 23 82 141 199 258 317

354 34 92 151 210 269 328

454 44 103 162 221 279 338

554 55 114 173 231 290 349 Alu

min

a (

$/t

)

Company Price Price Mkt Cap Mkt Cap EV

US$ Local US$'Mn Local Mn US$'Mn 2020 2021 2022 2023 2020 2021 2022 2023 2020 2021 2022 2023

HINDALCO INDS 6.96 520.2 15,651 11,68,979 22,374 26.48 8.95 8.55 8.63 10.68 6.00 5.28 4.91 6% 8% 11% 12%

NATIONAL ALUMIN 1.56 116.15 2,856 2,13,325 2,465 46.22 7.41 N/a N/a N/a N/a N/a N/a 2% N/a N/a N/a

VEDANTA LTD 4.72 352 17,528 13,08,453 22,541 26.21 8.01 6.34 6.25 9.99 4.29 3.66 3.62 9% 14% 17% 19%

NORSK HYDRO ASA 8.81 78.32 18,230 1,62,044 18,548 66.11 12.77 8.88 10.12 13.55 6.36 4.68 4.88 4% 3% 9% 9%

RUSAL 0.89 6.94 13,514 1,05,440 17,505 17.79 3.78 3.33 3.36 22.44 5.99 4.17 3.73 7% 10% 15% 16%

ALCOA CORP 74.09 74.09 13,862 13,862 15,386 N/a 10.85 9.04 9.51 14.12 5.59 4.26 4.13 0% 4% 9% 9%

PE (x) EV EBITDA (x) FCF Yield (%)

8

Management Profile

The company’s Board is comprised of five Full-time (Executive) Directors including Chairman-cum-Managing Director, two government nominee

directors and seven independent directors.

Key Management Personnel Experience

Mr. Sridhar Patra

Chairman-cum-Managing Director.

Chartered Accountant, graduate in

Commerce from Utkal University

Mr. Sridhar Patra is the Chairman cum managing director of the company since 17Th Dec 2019. Prior

to appoint as CMD, he was serving as the Director (Finance) of the Company. Prior to joining

NALCO, Shri Patra was the Director (Finance) of THDC India Ltd. In his three decades of career, he

has worked in various PSUs including Odisha Mining Corporation Ltd. (OMC), Indian Rare Earths

Ltd. (IREL), and Mangalore Refinery & Petrochemicals Ltd (MRPL).

Mr. Ramesh Chandra Joshi

Director (Finance)

Mr. Ramesh Chandra Joshi took charge as the Director (Finance) of NALCO, on 04th Feb 2022. He

has a rich experience in various area of Finance spanning over 32 years, which includes 27 years in

NALCO in the core areas of finance coupled with in-depth understanding of financial, contractual

and regulatory issues. He is also a nominee director on the Board of M/s Angul Aluminum Park Pvt

Ltd, a JV of NALCO and IDCOL.

Mr. Radhashyam Mahapatro

Director (HR)

Physics graduate Khallikote

College, Berhampur, Odisha, Post

Graduation in Industrial Relation & Labor

Welfare from Berhampur University

Mr. Radhashyam Mahapatro joined the Company as Director (HR) from 1st Jan 2020. He has rich

experience in Power, Oil and Coal Sectors in different capacities and successfully shouldered varied

responsibilities. During his tenure in NHPC, Engineers India Limited and Central Coalfields Ltd, he

was instrumental in the introduction of Productive work culture through Team Work

Mr. Manasa Prasad Mishra

Director (P & T)

Mechanical Engineering from University

College of Engineering, Burla, Odisha

Mr. Manasa Prasad Mishra joined the Company as Director (Projects & Technical) w.e.f. Nov 2020.

He joined NALCO as a Graduate Engineer Trainee (GET) in 1984. During his long service

association of three and half decades with NALCO, he has contributed significantly from Technology

adoption to absorption in the field of Aluminum Technology.

Mr. Bijay Kumar Das

Director (Production) and

Director (Commercial) Additional Charge

Mechanical Engineering from

NIT, Rourkela

Mr. Bijay Kumar Das taken over as the Director (Production) of the company from Dec 2020. He

began his career in NALCO as a 1st batch Graduate Engineer Trainee in 1984. He was posted in the

Company’s Captive Power Plant in Angul from inception of the project, where he held different key

positions in O&M before taking over the challenging assignment of Business Development of the

Company.

Source: company

9

Key Risk & Mitigation

Price volatility: NALCO being pure equity play on Aluminium and Alumina commodities, its directly

exposed to market determined LME Aluminium and Alumina prices. LME Aluminium and Alumina prices

are volatile and can impact the company's profitability.

Metal premiums: The price of aluminum in the international and domestic markets also includes a local

market premium above the LME prices. Metal premiums are volatile and derivative contracts to offset the

adverse impacts are not prevalent in the market.

Industry cyclicality and the global economy: The metal industry is cyclical and depends largely on

global and regional economic growth and has a significant correlation with GDP growth. The slowdown

in economic growth or economic contraction may lead to a slowdown in metals demand and impact the

commodity prices and industry in general. Geopolitical events, natural calamities such as floods can

impact the supply and demand of aluminium, alumina and copper and can increase price volatility.

Raw material availability and inflation: The company has FSA with Coal India subsidiaries for coal

requirement for its CPP and Alumina refinery. It has ~85% coal through FSA and linkage for its CPP,

while remaining it sources from e-auction spot sales. The company is exposed to raw material inflation

as it purchases CP Coke, CT pitch and Caustic Soda from the market. It has formed a JV with Gujarat

Alkalies and Chemicals Ltd. (GACL) for securing the Caustic soda supply.

Regulatory Risk: Both bauxite and coal mining and their ownership are controlled by regulations.

Bauxite mining lease renewal, coal supply security, changes in tariffs, royalties, customs duties, and

changes in rules and regulations pose risks that can affect the cost and availability of raw materials.

Another threat includes crackdown by Governments against environmental hazards associated with

discharge of effluents like red mud or air pollution due to coal based power plants. Company engages

with regulatory authorities and has a risk management committee to comply with various regulatory

parameters.

The threat of substitutes like improvised steel, PVC, engineered wood, glass, carbon fibre, composites,

etc. are also perennial in nature. Import of Aluminium into India also poses a risk for market share of the

company.

Nalco is sensitive to Aluminum, Alumina and input raw material such as coal and caustic soda prices. Unfavorable price movement will adversely impact our target price and rating.

10

Aluminum market to remain in deficit supporting prices

Aluminium supply side impacted by climate megatrends: As we have written earlier in our note ( ),

we have a positive outlook on Aluminium. China’s decarbonisation policy is impacting the Chinese supply

and would drive the deficits in coming years. More than 80% of China’s aluminium production is powered

by coal and the supply cut to limit pollution impacted the global aluminium markets as China produces

>50% of the world’s aluminium (~38MnT out of global production of ~67MnT in 2021). China is expected

to remain in primary aluminum structural deficit (~1-2 Mtpa) in 2022. Smelter cuts also led to higher

imports, China’s import of unwrought aluminium and alloys was 2.7MnT in 2021, a new record high and

up from 2.3 MnT in 2020.

High European Power prices and Russia Ukraine tension adds risk premium to already stretched

aluminium market: In Europe, the power prices have increased substantially, driving smelters to halt

production. Out of Europe's total aluminium capacity of 4.5MnT, according to various global consultants,

~650Kt-730Kt capacity is cut so far, ~15% of the total operating capacity supporting Aluminium prices.

European metal premiums have increased over the last year, reflecting the physical tightness of the

metal. Russia and Eastern Europe production stood at 4.1MnT in 2021, out of which Rusal alone

contributed 3.764MnT in 2021. Russia is the 2nd largest producer after China, and Rusal’s 40% revenue

is from European shipments. The market has priced in the risk premium as Russia Ukraine tension could

put sanctions blocking Russian supply to the market, as a result, the LME spot prices have increased to

record high level above $3,300/tonne on 17th Feb 2022.

With supply disruptions and strong underlying demand the LME and SHFE stocks are on declining trend.

LME inventories have stood below 0.9MnT since Nov 2021. The aluminium market will remain

sensitive to supply shocks as a result of historically low stocks of the metal.

While the Russia and Ukraine crisis could de-escalate and power prices could normalise in Europe

bringing more supply onto the market, Chinese production is relatively inelastic owing to the smelting

capacity cap of 45mtpa of aluminium. With Chinese production already at 38.8 MnT in 2021, or 59% of

the global total, China offers limited scope for expansion of production under current policy.

Demand for Aluminium remains firm, and post the winter Olympics, China could likely introduce some

form of stimulus in response to weakening economic growth prospects driven by real estate weakness

and Covid-19-related lockdowns. Aluminium prices will be supported by the accelerating shift to a green

economy, in particular by sustained demand from the electric vehicles, solar panels, packaging

applications and construction demand. Based on above factors, In 2022, the Aluminium market is likely

to be in a deficit of ~1.4Mnt a second consecutive time (2021 deficit of ~0.9Mnt).

Alumina prices increased in Sept Oct 2021 around a level of $480/tonne led by coal crisis in China, as

refineries cut production due to higher power costs. With the receding of the coal crisis, the prices have

corrected to the normal range between $300- 400/tonne. However, current spot prices have again

increased to $395/tonne on Feb 17th 2022. Fastmarkets reported deals at $410/tonne on Feb 15

indicating a tightening supply of Alumina.

Exhibit 26: LME Aluminum prices at highest level since 2008 Exhibit 27: LME Al at backwardation since Mid Jan 22 (Currently at $47/t)

Source: Bloomberg

1,000

1,500

2,000

2,500

3,000

3,500

-60

-40

-20

0

20

40

60

In 2022, the Aluminum

market is likely to be in

a deficit of ~1.4Mnt a

second consecutive

time (2021 deficit of

~0.9Mnt).

11

Exhibit 28: LME and SHFE stocks at decade low level Exhibit 29: China‘s Jan 2022 Aluminum production declined 8% YoY

Source: Bloomberg, IAI

Exhibit 30: China Aluminum production growth at 4% YoY in 2021. China production growth is plateauing

Exhibit 31: China Net imports of Unwrought Aluminum and Al alloys at decadal high level of 2.6Mnt

Source: Bloomberg, IAI

Exhibit 32: Regional premiums are high. Exhibit 33: Alumina prices again touching $400/t level

Source: Bloomberg

Exhibit 34: Global balance estimates: Energy policy impacting Chinese

supply and driving deficit in coming years Exhibit 35: 2nd consecutive year of deficits, stocks remain low

Source: Alcoa, Norsk Hydro

0

500

1000

1500

2000

2500

3000

3500

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Th

ou

san

ds

LME SHFE LME Aluminium price spot ($/t), Rhs

-20%

-10%

0%

10%

20%

30%

40%

2,000

2,500

3,000

3,500

Jan

-16

Jul-1

6

Jan

-17

Jul-1

7

Jan

-18

Jul-1

8

Jan

-19

Jul-1

9

Jan

-20

Jul-2

0

Jan

-21

Jul-2

1

Jan

-22

China Aluminium Production (kt) YoY %

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

China RoW World

0.0

0.0 -0.1-0.3 -0.3 -0.3 -0.4 -0.4 -0.3

2.1

2.6

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

0

500

1000

Midwest Ali ingot premium EU Rotterdam Ingot premium

Japan

100

200

300

400

500

600

700

Feb-17 Feb-18 Feb-19 Feb-20 Feb-21 Feb-22

12

Financials (Consolidated)

Profit & Loss (Rs Cr)

Y/E March FY 21A FY 22E FY 23E FY 24E

Total Operating income 8,956 13,345 13,528 13,591

Consumption of Raw Materials 1,315 1,769 1,780 1,726

Increase/Decrease in Stocks (6) (43) - -

Power & fuel 2,638 3,319 3,234 3,183

Employees Cost 1,930 2,237 2,282 2,326

Other Expenses 1,295 1,799 1,888 1,983

Total Expenditure 7,173 9,081 9,184 9,218

EBITDA 1,783 4,265 4,343 4,373

Depreciation and Amortization 606 603 664 718

EBIT 1,177 3,661 3,679 3,655

Other Income 147 213 258 259

Share Of P/L Of Associates (Net of Tax) (0) (0) - -

Less: Interest & Fin Chg. 7 7 16 41

Less: Exceptional Items - - - -

Profit before tax 1,316 3,867 3,921 3,874

Provision for Tax 17 982 984 972

Reported PAT 1,299 2,885 2,938 2,902

EPS (Rs/sh) 7.0 15.7 16.0 15.8

DPS (Rs/sh) 3.5 8.0 8.0 8.0


Balance Sheet (Rs Cr)


Net Block 7,317 7,714 7,950 8,232

CWIP 1,431 2,431 3,331 4,331

Intangible assets 488 488 488 488

Investments 560 560 560 560

Inventories 1,476 2,200 2,230 2,240

Trade Receivables 147 220 223 224

Cash / Bank balance 1,750 1,850 2,318 2,463

Misc. Assets 1,540 1,540 1,540 1,540

Total assets 14,709 17,002 18,638 20,076

Equity capital 918 918 918 918

Reserves 9,761 11,543 13,010 14,442

Borrowings 46 96 246 246

Def tax Liabilities 894 894 894 894

Other Liabilities 1,358 1,358 1,358 1,358

Provisions 793 793 793 793

Trade Payables 940 1,400 1,419 1,426

Capital employed 14,709 17,002 18,638 20,076


13

Cash Flow (Rs Cr)


Profit after tax 1,299 2,885 2,938 2,902

Depreciation 606 603 664 718

Interest Expenses 7 7 16 41

Non-operating / EO item (136) - - -

Change in W/C 423 (335) (14) (5)

Operating Cash Flow 2,199 3,160 3,604 3,656

Capital Expenditure (1,173) (2,000) (1,800) (2,000)

Free cash Flow 1,026 1,160 1,804 1,656

Other Investments (231) - - -

Investing Cash Flow (1,404) (2,000) (1,800) (2,000)

Proceeds / (Repayment) of Borrowings 30 50 150 -

Payments for buy-back of equity shares (170) - - -

Finance cost paid 0 (7) (16) (41)

Dividend paid (461) (1,103) (1,470) (1,470)

Financing Cash Flow (600) (1,060) (1,336) (1,511)

Change in Cash 195 100 468 145

Opening Cash 18 214 314 781

Closing Cash 214 314 781 926


Ratio Analysis (x) / (%)


Operational Ratios

Sales growth (% YoY) 6% 49% 1% 0%

EBITDA growth (% YoY) 264% 139% 2% 1%

Op. profit growth (% YoY) -2999% 211% 0% -1%

Net Profit growth (% YoY) 854% 122% 2% -1%

EBITDA Margin % 20% 32% 32% 32%

Net profit Margin % 15% 22% 22% 21%

Tax Rate % 1% 25% 25% 25%

Efficiency Ratios

Total Asset turnover (x) 0.6 0.8 0.8 0.7

Sales/Gross block (x) 0.9 1.2 1.1 1.0

Sales/Net block(x) 1.2 1.7 1.7 1.7

Working capital/Sales (x) 0.08 0.08 0.08 0.08

Valuation Ratios

PER (x) 5.1 5.6 7.3 7.4

P/BV (x) 0.6 1.3 1.5 1.4

EV/Ebitda (x) 2.8 3.4 4.5 4.4

EV/Sales (x) 0.5 1.1 1.4 1.4

Dividend Yield (%) 9.9% 9.1% 6.8% 6.8%

Return Ratios

ROE 12.6% 24.9% 22.3% 19.8%

ROCE 9.3% 26.4% 23.2% 21.0%

ROIC 9.4% 19.2% 17.2% 15.6%


14

NALCO Price Chart and Recommendation History

Date Reco TP Research

23-Feb-22 BUY 150 Initiating Coverage

Source: Axis Securities

15

About the analyst

Analyst: Aditya Welekar

Email: [email protected]

Sector: Metals & Mining

Analyst Bio: Aditya Welekar is PGDBM in Finance with 10 years of experience in Equity Market/Research.

Disclosures:

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16

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DEFINITION OF RATINGS

Ratings Expected absolute returns over 12-18 months

BUY More than 10%

HOLD Between 10% and -10%

SELL Less than -10%

NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

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