Nalco: Retain ‘buy’ on strong earnings outlook

With spot LME aluminum hovering at ~$2,450/t+ (up ~10% YTDFY22), then near-term profitability outlook is strong.

Beneficiary of higher aluminum prices: Retain ‘buy’ on strong earnings outlook. Nalco (NACL’s) 4QFY21 result was strong, led by higher LME prices and lower costs. It reported ebitda of Rs 9.4billion (+118% QoQ) and PAT of Rs 6.3billion (+162% QoQ). We raise our FY22E/FY23E ebitda estimate by 43%/27%, factoring in higher aluminum prices, which should support strong cash flows and a good dividend payout. Maintain ‘buy’.

Higher LME and lower costs boost ebitda by 118% QoQ: Revenue /ebitda / Adj. PAT was up 19%/118%/162% QoQ tonne Rs 28.2billion/Rs 9.4billion/Rs 6.3billion (+3%/49%/63% v/s our estimate). The beat on ebitda was led by better-than-expected costs, partly owing to the reversal of renewals purchase obligations — as per the notification issued by Odisha Electricity Regulatory Commission — booked under other expenses. Employee cost was down 11% QoQ to Rs 4.31billion and other expense 31% QoQ to Rs 2.8billion. The company has opted for the new tax regime, thus reversing its deferred tax liabilities by Rs 4.23billion — leading to net tax credit of Rs 0.97billion during the quarter. Adjusted PAT, thus, stood at Rs 6.3billion (+162% QoQ; +63% v/s est). FY21 rev /ebitda/ adj. PAT stood at Rs 89.5billion/Rs 17.8billion/Rs 9.9billion (+6%/+2.6x/+6.0x YoY). OCF/FCF stood at Rs 22.0billion/Rs 9.8billion (v/s – Rs 3.5billion/–Rs 12.0billion). Aluminum: It reported ebit at Rs 5.9billion (up 273% QoQ). Revenue rose 19%n QoQ to Rs 19.4billion on higher LME ($2,093/t; +9% QoQ) and higher volumes. Aluminum production was up 10% QoQ to 112kt. Alumina: Revenue (including inter-segment) stood at Rs 12.1billion (+23%n QoQ). EBIT came in at Rs 2.96billion (+65% QoQ). Alumina external sales rose 10% QoQ to 378kt. Valuation and view: With spot LME aluminum hovering at ~$2,450/t+ (up ~10% YTDFY22), then near-term profitability outlook is strong.

Alumina prices have not yet reacted to the strength in aluminum and could surprise positively in FY22. With integrated mining operations, NALCO is the best play on higher LME prices. Given the tight demand-supply scenario, we expect aluminum prices to remainn strong. Although, prevailing higher inventory could limit a further upside. We factor in LME prices of USD2,300/USD2,150 per tonne for FY22E/FY23E. The management has announced a 1mtpa alumina refinery expansion at capexn of ~INR64b and expects to complete the project in FY23. Given the slow execution, however, we expect commissioning by FY24. We value the stock on an SoTP basis at 5x FY23E EV/EBITDA and a 0.75x bookn value for growth CWIP to arrive at TP of INR93. At CMP, it provides an attractive dividend yield of ~6%. Maintain Buy.