Nalco: Shaping up

Amidst softness in the metal sector, the stock of State-owned aluminium major National Aluminium Company (Nalco) has been on the rise. Its price has jumped from a low of ₹31 in mid-February to about ₹40 now.

This was aided by three things. One, the company announced plans to buy back 25 per cent of the government’s shareholding. Two, ore production increased in 2015-16, and there are plans to increase output in the next few years. Three, its overseas and local expansion plans should aid revenue and profit in the long term.

After the run up, Nalco’s stock trades at 12 times trailing 12-month earnings. This is close to the stock’s three-year average valuation and cheaper than that of peers, such as Hindalco (trading at over 20 times). Nalco has a strong balance sheet (debt-free with healthy cash reserves), access to high-grade bauxite ore and coal blocks. Its cost of alumina (processed bauxite) production is now the cheapest in the world. 

While the near-term prospects may be iffy due to softness in global aluminium prices, the company’s long-term revenue and profit growth seem solid.

The company also pays dividend consistently and the current dividend yield is 4 per cent. It has cash reserves of about ₹4,600 crore.

Given the company’s strong fundamentals, investors with a two-year view can buy the Nalco stock to profit from aluminium demand growth globally over the long term.

Nalco derives revenue from the sale of bauxite ore, alumina as well as aluminium metal.

Aluminium metal prices have been in a downtrend globally, as demand from China, which consumes about 50 per cent of primary aluminium, has been soft. Prices have dropped about 15 per cent over the past year to about $1,570 per tonne; this is lower than the average production cost of $1,500 to $1,700 per tonne.

In the nine months ended December 2015, Nalco’s revenue fell 11 per cent year-on-year and profit slipped 46 per cent due to shift in product mix and losses in the aluminium segment.

But aluminium prices have stabilised in the last few months and are likely to remain at these levels or improve in the next few years.

Nalco, which earlier shuttered some of its 0.46 million tonnes (mt) of aluminium capacity to cut losses (output was only 0.33 mt in 2014-15), has been working on producing metal at a lower cost. Going forward, higher share of aluminium in the product mix should help improve revenue as aluminium sale prices are six times that of alumina.

It plans to add 0.5 million tonne aluminium production capacity in Iran where power costs are only half that paid by Nalco in India.

Power accounts for 40 per cent of metal production costs and output from this initiative would start soon (before smelters come up) with Nalco paying a tolling fee to existing smelters to produce aluminium.

Also, the company is acquiring 26 per cent stake in Kakrapar Atomic Power Project through a joint venture with the Nuclear Power Corporation of India, which will provide access to power.

Nalco was allocated Utkal-D and E coal blocks in Odisha, and fuel from the captive blocks will help production cost by about ₹500 a tonne. Reduced costs should put aluminium output on track.

Also, Nalco’s output in 2015-16 has been its highest ever. Bauxite ore production increased 10.5 per cent year-on-year to 6.3 million tonnes; alumina output was up 5.5 per cent to nearly two million tonnes.

Aluminium production and sales jumped 13.8 per cent and 14.2 per cent, respectively, to 0.37 million tonnes as some of the capacity shuttered in 2014-15 was revived.

Bauxite and alumina production targets for 2016-17 are 7 and 9 per cent higher, respectively. Demand for aluminium, which stands at about 2 MT in India, is increasing at 6 per cent and nearly half of it is met through imports.

Nalco’s margins are likely to increase from higher share of metal revenue as well as lower production costs. Its alumina production cost has reduced to $190 a tonne compared with the global benchmark of $220-230 a tonne.

The company is also working on a joint venture with Gujarat Alkalies and Chemicals to set up a caustic soda plant, by way of backward integration. Caustic soda availability is low and the plant will help reduce costs by substituting imports. 

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