Nalco?s Q2FY11 profit after tax went up 41% YoY to Rs 2.2 bn, below our estimates of Rs 3.3 bn due to lower-than-expected alumina reali- sations and higher-than-expected power and fuel costs due to seasonal reasons.
Net sales increased 25% YoY to Rs14.8 bn. Production of calcined alumina remained flat YoY at 379,500 tonnes and that of aluminum increased 7% YoY to 110,333 tonnes. Production of hydrate suffered due to a shutdown for four days to hook up a new stream of expansion.
Sales of aluminum increased 3% YoY to 108,515 tonnes. Though only 170,000 tonnes were available for sale, alumina sales increased 38% YoY to 226,032 tonnes augmented by de-stocking.
Ebitda (earnings before interest, taxes,depreciation and amortisation) grew 24% YoY to Rs 3.5 bn, below our estimate of Rs 4.9 bn, as the cost of production of aluminum smelting rose due to the higher cost of coal for captive power generation. The cost of coal increased, because Nalco had to buy more imported coal as linkage coal supply from Coal India was reduced during the quarter.
According to our calculations, the cost of production of aluminum was $1,848/tonne (including depreciation), an increase of $168/tonne QoQ. Nalco will be receiving 0.5 mt of coal from linkages as against requirement of 0.65 mt post-expansion. Thus the company will remain in deficit of coal till production from Utkal E block starts; which is expected in 2013.
Alumina refinery expansion to 2.1 mtpa from existing 1.6 mtpa is expected to be completed by end of FY11. Though Nalco is trying aggressively on a number of expansion projects, actual work on ground is still many years away. At the end of Q2FY11, cash and equivalents were Rs 36.6 bn or an increase of Rs 5 bn in the past six months. We have cut FY11 EPS (earnings per share) by 6% to Rs 18.1 to factor in below expected results. Also, we have changed LME (London Metal Exchange) assumption from $2,000/tonne to $2,100/tonne and $/Re rate from 46 to 44.5.
Key investment arguments: The company has increased its production capacity at an appropriate time: aluminum smelter from 345 ktpa (thousand tonne per annum) to 460 ktpa, alumina refinery from 1.6 mtpa to 2.1 mtpa and captive power from 960 MW to 1,200 MW. The company has been allotted a coal block, Utkal E, which will insulate Nalco from input price risks.
Key investment risks: An unexpected fall in aluminum prices may impact profitability.
Valuation and view: The stock is trading at rich valuations 17.9x FY12e P/E (price-to earning) and 9.3x EV(enterprise value)/Ebitda. Maintain Sell.