NALCO - 1QFY2013 Result Update - Angel Broking

For 1QFY2013, National Aluminium Co Ltd (Nalco)'s profitability was above our expectations. However, we recommend a Reduce rating on the stock due to its expensive valuation.

Muted top-line growth: Nalco's net sales grew marginally by 0.9% yoy to Rs.1,718cr (slightly above our estimate of Rs.1,666cr). Alumina sales volumes grew by 38.3% yoy to 253kt while aluminium sales volumes decreased by 5.5% to 103kt.

Higher input and energy costs hit margins: Raw material costs as a percentage of net sales stood at 14.3%, compared to 10.3% in 1QFY2012 due to higher prices of key inputs (caustic soda, CP coke, CP pitch and aluminium fluoride). Further, power costs as a percentage of net sales stood at 35.2%, compared to 27.7% in 1QFY2012. Thus, the EBITDA declined by a massive 42.6% yoy to Rs.304cr and the net profit decreased by 40.8% yoy to Rs.223cr (above our estimate of Rs.167cr).

Update on Utkal coal block: Nalco had received compliance letter for its Utkal coal block during September 2011. However, there is lack of clarity on the completion of other regulatory formalities in the near term. Hence, production from this block is unlikely to start in FY2013 in our view.

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 current market price, Nalco is trading at valuations of 8.2x FY2013E and 6.8x FY2014E EV/EBITDA, ie at a significant premium to its peers. Hence, valuing the stock at 6.0x FY2014E EV/EBITDA, we derive a target price of Rs.48 and recommend Reduce on the stock.

Source : Equity Bulls

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