We have cut our FY13/14E EPS for Nalco by 20%/ 24% and price objective to R37 as we build in our global teams new aluminium price estimates, cut volume estimates and lift our cost forecast.
Aluminium prices are down 8%YTD and should remain range-bound, in our view. Coal supply improved in the December quarter, but sustainability appears doubtful.
Nalcos aluminium output has been affected by lower aluminium LME and coal supply/cost issues. We believe Nalco will continue to face cost pressure. Visibility on future expansion is poor. Hence, we maintain our underperform rating on the stock.
Our global team has cut aluminum price estimates for FY13e by 1.1% to US$1977/t and for FY14e by 2.4% to US$2013/t, mainly due to mark to market. We expect aluminium prices to be range-bound as upsides are likely to be capped by structural overcapacity and high inventories while financing deals and tight physical markets may offer downside support, in our view.
The shape of forward curve has changed. This has adversely affected the economics of financing deals, thus increasing metals availability. This may improve buyers willingness to transact through LME (hence, offer some price support), but lead to lower physical premia.
Nalco plans to operate its smelters at 88-89% utilisation as it faces coal supply constraints & aluminium production based on imported coal is not viable at current aluminium prices. Alumina output in Q3 was affected by suspension of its bauxite mine due to mining lease expiry.
Bauxite mining has restarted. We expect alumina output to grow 12%y-o-y in FY14e. We expect Nalco to face cost pressure due to partial dependence on costlier eauction/imported coal. Other raw material costs have eased, which is a positive. However, a meaningful reduction in cost pressure is unlikely till captive coal from Utkal E coal block starts (target end CY13). Land acquisition is still pending and is in progress. We see scope for delays.