We have released 9th May’20: National Aluminium Company Ltd (NSE Code – NATIONALUM) – Alpha/Alpha Plus stock for May’20. For details and other updates, please log into the website at the following link – http://katalystwealth.com/index.php/my-account/
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Date: 9th May’20
CMP – 28.40 (BSE); 28.45 (NSE)
Rating – Positive – 4% weightage; this is not an investment advice (refer rating interpretation)
National Aluminium Company (NALCO) is a Navratna Central Public Sector Enterprise under the Ministry of Mines. The Govt. of India holds 51.50% stake in the same.
The company has integrated operations in mining, metal and power with presence in all the three stages of aluminium production—bauxite, alumina and aluminium. Due to its access to high quality bauxite and coal mines, its cost of production is one of the lowest in the world.
It also operates 1,200 MW coal-based captive power plants, which are sufficient for its entire aluminium smelting capacity.
At around CMP of 28-29, we are looking at the company as a medium-term cyclical bet and the reasons are as follows:
- The stock is currently trading around 15 years lows of 25-30 odd levels.
- The company is debt free and had a cash balance of around Rs 2,100 crore (primarily in the form of fixed deposits) at the end of Dec’19 against market cap of Rs 5,300 crore
- NALCO is one of the lowest cost producers of Alumina across the world
- Internationally, Aluminium and Alumina prices are heading towards record lows
- On account of correction in Alumina and Aluminium prices, NALCOs EBITDA margins have contracted to 1-2% from the highs of 34% recorded in Jun’18
- As mentioned above, the stock is trading near cyclical lows and tends to follow the Aluminium price pattern.
- Lastly, the company has been consistently paying annual dividend of Rs 2 or more. In CY 2019, the company paid dividend of Rs 5.75 per share.
NALCO is India’s largest integrated Alumina-Aluminium complex, comprising bauxite mining, alumina refining, aluminium smelting and casting, power generation, rail and port facilities.
The capacities of the operating units are as below:
Source: Nalco Products folder
NALCO operates captive high-quality bauxite mines, which meet 100% of its alumina requirement for manufacturing aluminium. The 1,200 MW coal-based captive power plants are sufficient for its entire aluminium smelting capacity, while for feeding coal, it has a fuel supply agreement with Mahanadi Coalfield Limited for around 85% of its requirements.
This integration confers significant cost advantages, making NALCO one of the few low-cost producers of alumina across the world.
Product-wise revenue contribution – NALCO primarily consumes Alumina for Aluminium production and sells the surplus to third parties in the export markets.
As per the credit rating report, the low production cost for alumina (on account of its high-quality captive bauxite mine) provides NALCO with the flexibility to sell additional alumina as and when aluminium prices are less remunerative than those of alumina, so as to maximize profitability.
The product wise revenue contribution is as below:
Source: Katalyst Wealth Research
Production, sales and realization –
Source: Katalyst Wealth Research
As can be noted above, FY 19 was the best year both in terms of production and realization per tonne; however, the prices have been collapsing since Jun’18 and now below cost of production for a lot of companies.
Tough times for Aluminium Industry
We believe Aluminium and Alumina is a deeply cyclical industry and generally for such industries it’s important to not get trapped when the going is good and the industry is flourishing, because sooner than later the fortunes turn for bad.
Similarly, bad times prove to be good from investment view point and based on the fall in the prices and the news flow it does look like the overall industry is going through a lot of pain.
As per the news report on Reuters, China’s biggest state-run aluminium producer, CHALCO is weighing the option of output cuts for aluminium and alumina. It is believed that most Chinese producers are losing money at current aluminium prices.
Source: Katalyst Wealth Research
As NALCO operates captive bauxite mines, its performance is largely a function of alumina and aluminium production and realizations for both.
For feeding coal, the company also has a fuel supply agreement with Mahanadi Coalfield Limited for around 85% of its requirement. However, like 9M FY 20, sometimes a shortage in the availability of coal from Mahanadi coalfield can lead to higher power and fuel costs and thereby some impact on EBITDA.
Production as well isn’t likely to change much as the company has been producing close to peak utilization levels.
Thus, the overall performance is largely impacted by the change in the prices of alumina and aluminium. As already indicated in the above sections, both are trading close to the record lows of the last 10 years and already domestic and international manufacturers have started incurring losses and mulling production cuts.
Source: Katalyst Wealth Research
Can the prices go down further?
Surely, the prices can go down further and that would further hurt the performance of NALCO and other companies; however, NALCO is still much better placed with its huge cash reserves and one of the lowest costs of production.
Also, while the exact bottom for an industry can’t be known, various details point to the fact that industry is much closer to cyclical lows than highs.
Source: Katalyst Wealth Research
Besides the above-mentioned dividends, the company also came out with Rs 500 crore buy back at Rs 75/- per share in 2018.
Considering much lower profits in FY 20, the dividend might be lowered to say Rs 2/- per share; however, at around current price it would still amount to 7% + dividend yield.
In our view, for deeply cyclical industries, earning is not a great tool for valuing the companies. Instead, replacement cost or other cyclical factors can prove to be more helpful.
NALCO is currently quoting at a market cap of 5,300 crore.
Against the same, the company has surplus cash to the tune of 2,100 crore which brings down the enterprise value to Rs 3,200 crore.
Further, the company has bauxite mining capacity of 6.82 MTPA, Alumina Refinery of 2.27 MTPA, Aluminium Smelting capacity of 0.46 MTPA and captive power plants (including wind power plants) of 1,400 MW.
The replacement cost for power plants is around 5 crore per MW which amounts to Rs 7,000 crore. As far as alumina refinery is concerned, the company is in the process of expanding the capacity from 2.275 MTPA to 3.275 MTPA at a projected cost of Rs 5,540 crore. So, for the existing capacity, the replacement cost will be around Rs 11,000 crore.
Further, we haven’t yet taken into account replacement cost for 0.46 MTPA Aluminium smelting capacity which could cost anywhere around Rs 5000 crore +.
Thus, the stock is currently available at an enterprise value of Rs 3,200 crore against replacement cost of more than Rs 22,000-23,000 crore.
With PSUs, capital misallocation has always been the major risk. Already, there are plans to diversify into unrelated minerals like Lithium and Cobalt and the same may prove to be value destructive.
The company is in the process of expanding its Alumina refinery capacity from 2.275 MTPA to 3.275 MTPA at a projected cost of Rs 5,540 crore. This expansion along with others can result in NALCO transforming from a cash rich company to moderately leveraged and can hamper the dividend paying ability of the company.
In the light of overall slowdown and further accentuated by Covid-19, the international prices for Aluminium and Alumina could fall further and could impact the stock price of the company.
Disclosure: I don’t have any investment in National Aluminium Company and have not traded in the stock in the last 30 days.
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Email: [email protected]
Positive – Expected return of ~15% + on annualized basis in medium to long term for investment recommendations and in short term for Special situations
Neutral – Expected Absolute return in the range of +/- 15%
Negative – Expected Absolute return of over -15%
Coverage closure – No further update on the stock
% weightage – allocation in the subject stock with respect to equity investments
Short term – Less than 1 year
Medium term – Greater than 1 year and less than 3 years
Long term – Greater than 3 years
Research Analyst Details
Name: Ekansh Mittal Email Id: [email protected] Ph: +91 727 5050062
Analyst ownership of the stock: No
Details of Associates: Not Applicable
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Disclosure (SEBI RA Regulations)
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