National Aluminium Company Ltd.(Nalco) the Navratana CPSE under ministry of mines. Nalco holds an advantage of producing the low cost alumina in the world. Nalco has integrated business process, from bauxite mining, alumina refining, coal mining, captive power generation and aluminium smelting. It generates power for aluminium smelting plants from own captive power plant. Nalco major products are hydrate, calcined alumina, special grade alumina, aluminum ingots, aluminum wire rods, billets and rolled products. Being a debt free and high dividend yield company with healthy cash, Nalco offers a value buying opportunity for investors. At CMP of Rs. 44.15,Nalco is trading at EV/EBITDA multiple of 1.7x which is lower to it’s global average peer of 4.8x.Taking into account Nalco integrated process and profitability. We assign a “BUY” rating to the stock with fair price of Rs. 66 per share.
Integrated operations leading to cost optimization
Nalco is one of the low cost producer of Alumina in the world with optimal capacity utilization. Nalco does bauxite mining ,refines alumina and has smelter plant to produce Aluminium. Nalco has integrated process of producing bauxite to aluminium smelting. Nalco has its own captive power plant which produces power from coal, wind and solar energy, this eventually reduces the cost of power and excess power produced by power plant is sold. Nalco reported highest metal production in FY19. Nalco Q4FY19 EBITDA grew 5.7% YoY/0.9% QoQ and power cost fell 14.1% YoY/21.8% QoQ. The cost structure of aluminium smelter is likely to improve after ramp up of utkal coal block in FY20 with additional capacity of 2 million ton.
Positive demand of aluminium across the world
The demand for light weight metal like aluminium is expected to grow in the world. It is expected that the demand for aluminium is likely to increase as a result of development in Railways, Metros, Electrical vehicle. Indian Railway recently announced to use aluminum in coaches over the steel coaches as they weigh light, that will improve the speed and operations. Being a low cost producer could benefit Nalco. LME aluminium prices during FY19 were trading between $1700-$2100t/- and USD/INR was strong in a continuous upward trend from Rs.65 to Rs.74, Combination of both resulted into better realization of sales.
Management focusing on diversification of business
Nalco is focusing on two new verticals Merchant mining and Lithium-ion. Nalco has incorporated JV with two PSU, MECL & HCL to explore and buy resources of Lithiumion in Argentina, Bolivia and Chile. Nalco is planning to produce high end alloys and batteries for space vehicles and electric cars, as ISRO has shortlisted Nalco for transfer of lithium technology and Nalco is looking for partnership with Japanese and Korean companies for making electric batteries. After partnership lithium will be used in batteries of electric vehicles which is currently imported with high tariff rates. Nalco has also launched a pilot project for exploring lithium resources in Gujarat and Rajasthan.
Capacity utilization and low power cost likely to support profitability
Nalco utilizes 100% capacity of bauxite mines, the power cost was up in Q2FY18-19 mainly due to coal shortage from captive coal mines. Utkal D&E coal mine is likely to start in March,2020.This could decrease the power cost and increase the profitability of the company. Nalco profitability is mainly dependent on power cost, LME prices and capacity utilization. Nalco does not hedge metal prices and currency, leading to a risk that could have an impact on profitability.
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