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
Source: Company, Axis Securities
Exhibit 7: FCF post growth capex to remain positive Exhibit 8: Attractive EV/EBITDA in FY22E/23E
Source: Company, Axis Securities
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
FY-17 FY-18 FY-19 FY-20 FY-21 FY-22E FY-23E FY-24E
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
Source: Company, Axis Securities
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 $400/tonne, Nalco is best
placed to ride the tailwinds and it has correctly started optimising its Aluminium production.
We expect Aluminium prices to remain high in FY23, as metal is expected to remain in a deficit in FY23
also. China’s focus to cut carbon emissions will limit supply from the region. In RoW, considering the long
term environmental impact, renewable power based brownfield or greenfield smelters will be difficult to
come online quickly, while demand will remain strong.
We value the stock at 5.5x FY24 EBITDA estimate and 0.5x book value of CWIP to arrive at our target
price of Rs 150, an upside of 25% from CMP. We initiate the coverage of Nalco with BUY rating.
Exhibit 22: DCF Valuation Exhibit 23: Sensitivity to LME Aluminum and Alumina Prices
Source: Company, Axis Securities
Nalco is highly sensitive to LME Aluminium and Alumina prices, 1% increase in the Aluminium price
increases the EBITDA by 2% and 1% increase in Alumina price increases the EBITDA by 1%.
Above (Exhibit 23) we show the impact of LME Aluminium and Alumina on the EBITDA and target price.
Exhibit 24: Aluminum comps
Source: Bloomberg, Priced as of 22nd Feb 2022.
Exhibit 25: Key Assumptions
FY-17 FY-18 FY-19 FY-20 FY-21 FY-22E FY-23E FY-24E
LME Aluminum ($/t) 1,847 2,044 2,037 1,752 1,805 2,700 2,767 2,789
Alumina price ($/t) 340 365 474 306 274 341 365 354
Alumina production (kt) 2,100 2,106 2,153 2,161 2,085 2,045 2,048 2,037
Aluminum production (kt) 387 426 440 418 418 455 446 443
Alumina Sales (kt) 1,295 1,337 1,318 1,304 1,228 1,260 1,218 1,222
Aluminum sales (kt) 386 426 441 396 423 440 439 443
EBITDA (Rs Cr) 1,080 1,397 2,893 489 1,783 4,265 4,343 4,373
INR USD 67 64 70 71 74 74 75 75
Source: Company, Axis Securities
Valuation Unit
EBITDA FY24E Rs Cr 4,373
Target EV/EBITDA 12MF (x) 5.5
EV FY23E Rs Cr 24,053
CWIP at FY23E (0.5x book value) Rs Cr 1,666
Net Cash FY23E Rs Cr 2,072
Equity Value FY23E Rs Cr 27,790
No of Shares Outstanding Cr 184
Target price FY23 Rs/sh 151
Target price FY23 Rounded to nearest 5 Rs/sh 150
CMP Rs/sh 117
Upside/(Downside) % 28%
LME Aluminium ($/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
Source: Company, Axis Securities
Balance Sheet (Rs Cr)
Y/E March FY 21A FY 22E FY 23E FY 24E
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
Source: Company, Axis Securities
13
Cash Flow (Rs Cr)
Y/E March FY 21A FY 22E FY 23E FY 24E
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
Source: Company, Axis Securities
Ratio Analysis (x) / (%)
Y/E March FY 21A FY 22E FY 23E FY 24E
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%
Source: Company, Axis Securities
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.
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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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