NALCO (Q3 FY14) – Market Performer - CMP Rs35.2, Target Rs36, Upside 2.1% - IIFL

NALCO's Q3 FY14 numbers were marginally weak on account of lower alumina sales. Alumina sales which have been the growth driver for the company over the last one year declined due to delay in one export shipment. Power costs were also higher than our estimate due to strike at coal mine which supplies coal to the company. Production of alumina was marginally lower than our estimate and that of aluminium was higher. Topline of Rs16.4bn was higher than our estimate due to higher aluminium sales and premium on aluminium sales. Alumina production for the quarter stood at 466,000 tons, 2.5% lower on a qoq basis. Sales declined sharply by 16% qoq on account of a delay in shipment of 60,000 tons. The impact of this would be seen in Q4 FY14 and would boost the company's earnings in Q4 FY14.

On a segmental basis, alumina division revenue jumped 15.3% yoy to Rs8.1bn on account of higher volumes and realization. Revenue from aluminium business fell sharply by 21% yoy to Rs10.1bn on account of lower aluminium production. Aluminium realizations higher by 2.4% yoy led by rupee depreciation and higher product premiums. Power business revenue decreased 24.3% yoy to Rs4bn due to lower power prices and lower production on account of lower coal availability.

Operating profit for the quarter stood at Rs2bn was marginally lower than our estimate of Rs2.2bn. The underperformance in operating profit was led by lower alumina sales and an increase in power costs. Availability of linkage coal was lower due to strike at MCL, the coal mine which supplies coal to NALCO. This led to an increase in power costs. Power costs as a % of sales increased from 29.5% in Q2 FY14 to 31.6% as aluminium production was marginally higher qoq. EBIT from the alumina division increased 24.1% yoy to Rs1,6bn due to higher alumina prices and volumes. However on a qoq basis it is sharply lower by 30%.

NALCO's operating profit has improved over the last one year on the back of higher availability of linkage coal and an increase in alumina sales. However, the supply of linkage coal has not been steady leading to variations in its quarterly numbers. We have lowered our metal production estimates inline with the management guidance and have increased our metal realizations for FY14 and FY15 to incorporate the depreciation in the rupee. We believe the upside for the stock would be capped around current levels and maintain our Market Performer rating with a price target of Rs36.

Source : Equity Bulls

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