We analysed NALCO’s FY18 annual report. Key takeways: Revenues from sale of metal and alumina increased 26%
y-o-y to Rs 93.7 bn driven by 21% increase in LME, partially offset by 4% appreciation of currency and 11% /3% increase in sales volumes for metal/alumina. Nalco realised a premium over the LME of $57/t on metal exports and $ 196/t in the domestic market. Alumina realisation was up 26% to $ 370/t.
Nalco has advantage of captive bauxite mines, coal linkage and logistics due to strategic locations. However, its wage bill keeps growing unfettered every year without corresponding improvement in productivity. Employee wages now account for more than $500/t in metal CoP (cost of production), which is the highest in the world. Although, total headcount declined 2% to 6,776, average recurring annual wages per employee increased 32% to Rs 2.9m – the highest in Indian metal and mining industry.
CoP of alumina increased by Rs 1794/t to Rs 14,417/t on an increase in input cost and wage hike. Rupee appreciation by 4% accentuated the impact in Dollar term. CoP increased by $35/t to $224/t.
Despite operating leverage due to a 10% increase in metal production, CoP of metal increased by Rs 16,235 to Rs 140,999/t ($2,187). Variable cost and wage hike were the key drivers, which offset marginal gains in manufacturing fixed expenses. Apart from the inflation in alumina CoP, Carbon, power and wage hike were the key drivers.
Consolidated Ebitda increased 55% to Rs 17 bn. Alumina remains the key driver of Ebitda. Cash flow after working capital changes was stable at Rs 14.7 bn. Increase in Ebitda by Rs 6 bn was offset by higher taxes (Rs 2.6 bn), and swing in working capital changes (Rs 1.4 bn), etc. Cash flows from investing activities were negative Rs 5 bn due to Rs 8.4 bn capex offset by interest and dividend income. Nalco stepped up dividend payout by 32% to Rs 11 bn and capex by 8%, yet net cash surplus remained flat at Rs 34 bn.
Nalco has increased bauxite production by 3% on opening of a new block south of Panchpatmalli mine. This will help improve alumina output. Nalco has also made some progress in Pottangi bauxite mine and Utkal D coal mine, which will help in growing earnings a few years down.
Nalco has also started work on 1mtpa expansion of alumina refinery at a capex of Rs 55.4 bn. The real benefit should be visible after commencement of Pottangi. We have changed Rupee/Dollar assumption by 7%, which has been partially offset by reduction in LME assumption. As a result, estimate for Ebitda has increased by 16/12% to Rs 33.1 bn/28.4 bn for FY19/FY20e. Stock is trading at attractive valuations i.e. EV/Ebitda of 3.4xFY20e and P/E of ~7xFY20e. We value the stock at Rs 107/share based on 5.5xEV/Ebitda for FY20e.
