Stock Market Result Update on National Aluminium for 2QFY2012

Stock Market Result Update on National Aluminium for 2QFY2012 with an Neutral recommendation.

National Aluminium’s (Nalco) 2QFY2012 profitability was significantly below our expectations on account of higher-than-expected raw-material and power and fuel costs. We have a Neutral view on the stock.

Higher realization leads to net sales growth: For 2QFY2012, Nalco’s net sales grew by 8.9% yoy to `1,584cr mainly due to increased realization, despite lower volumes. Realization of alumina and aluminium grew by 29.4% and 23.1% yoy to US$400 and US$2,599, respectively. However, the company lost production of atleast 6,000 tonnes of aluminium metal on account of coal supply disruptions by Mahanadi Coalfields.

Lower domestic coal supplies hit margins: Raw-material cost as a percentage of net sales stood at 18.7% in 2QFY2012 compared to 15.5% in 2QFY2011. Further, power and fuel cost as a percentage of net sales stood at 40.3% in 2QFY2012 compared to 34.1% in 2QFY2011. The company had to import coal on account of lower supplies from Mahanadi Coalfields, which resulted in higher power costs. Hence, EBITDA decreased by 56.1% yoy to `153cr and EBITDA margin contracted by massive 1,427bp yoy to 9.6%. Other income grew by 54.7% yoy to `132cr and tax rate stood at 16.4% in 2QFY2012 compared to 33.7% in 2QFY2011. Consequently, net profit decreased by 37.8% yoy to `139cr (significantly below our estimate of `268cr).

Outlook and valuation: Although Nalco enjoys high levels of backward integration, the cost of production remains very high for Nalco. Further, there is lack of clarity over Nalco’s volume growth. At the CMP, Nalco is trading at valuations of 7.4x FY2012E and 4.5x FY2013E EV/EBITDA, higher than its peers. Hence, we recommend Neutral on the stock.