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Emkay
India Equity Research | Metals & Mining
January 15, 2016
Initiating Coverage
National Aluminium Co
Better positioned in a rough weather!
CMP Target Price
Rs37 Rs51 (����)
Rating Upside
BUY (����) 37.8 %
Change in Estimates
EPS Chg FY16E/FY17E (%) NA
Target Price change (%) NA
Previous Reco NOT RATED
Emkay vs Consensus
EPS Estimates
FY16E FY17E
Emkay 3.0 3.7
Consensus NA NA
Mean Consensus TP Rs 41
Stock Details
Bloomberg Code NACL IN
Face Value (Rs) 5
Shares outstanding (mn) 2,577
52 Week H/L 53 / 28
M Cap (Rs bn/USD bn) 88 / 1.30
Daily Avg Volume (nos.) 1,373,075
Daily Avg Turnover (US$ mn) 0.8
Shareholding Pattern Sep '15
Promoters 80.9%
FIIs 2.8%
DIIs 9.5%
Public and Others 6.7%
Price Performance
(%) 1M 3M 6M 12M
Absolute (18) (15) (12) (27)
Rel. to Nifty (3) (4) 3 (15)
Relative price chart
Source: Bloomberg
Goutam Chakraborty
+91 22 66121275
Deepankar Kohli
+91 22 66121244
-40
-28
-16
-4
8
20
20
28
36
44
52
60
Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16
%Rs
National Aluminium (LHS) Rel to Nifty (RHS)
� National Aluminium Company (NALCO) is a PSU with 460 kt smelting facility, 1200 MW
power plant and 2.23 mtpa alumina refinery supported by 6.8 mtpa bauxite mine. It is one
of the lowest cost aluminium producers in the world and better positioned among the peers
� Low cost alumina business with 36% RoCE (FY15) has been the backbone of the
company, as metals business RoCE has been very weak since last five years. With
disrupted coal availability and weak prices, NALCO has cut smelter utilization to ~70%
� NALCO recently got back its earlier de-allocated Utkal E coal block along with Utkal D coal
block. This is going to be a big boost for the company’s smelter operations going forward,
as it will help smoothen coal supply and cost savings of ~Rs 500/ tonne aluminium
� Strong balance sheet with net cash of Rs 53.3 bn (Rs 21/ share). Focus stays on profitable
alumina segment. Valuation looks cheap at 8.7xFY18 PE and 3.0xFY18 EV/ EBITDA.
Initiate coverage on NALCO with a Buy rating and a target price of Rs 51
Best positioned among domestic peers being net long in alumina
NALCO, a Navaratna PSU, is an integrated aluminium producer. It has 6.8 mtpa bauxite mine,
2.23 mtpa alumina refinery and 460 ktpa aluminium smelter along with 1200 MW captive
power generation capacity. Being strategically located (Odisha) with nearby operations helps
it in cost optimizations. The biggest driver for NALCO has been its surplus alumina with RoCE
of 36% (FY15). Good quality bauxite from own mine makes it more profitable. Thus, as a step
in the right direction, the company is investing more into alumina business, which will ensure
better margins in future. We expect aluminium business not to contribute meaningfully unless
there is a significant and sustained rise in LME towards US$2000/ tonne.
Coal availability improved, own mines to aid profitability
NALCO had suffered due to poor coal supply by Coal India during FY12- FY14. With higher
output and better evacuation from Coal India, NALCO has seen improvement in cost
structure. With allocation of Utkal D and E coal blocks by the government, there would be
significant cost saving. Coal cost is likely to come down by ~Rs 500/ tonne of aluminium.
Sound financials and attractive valuation
Unlike its peers, NALCO is debt free, which is a major benefit for cyclical nature of business.
NALCO has net cash of Rs 53.3 bn (Rs 21/ share). After meeting future capex requirements
also, we see net cash generation due to better profitability. Valuation looks attractive as at the
CMP of Rs 37, the stock is trading at 8.7xFY18 EPS and 3.0xFY18 EV/ EBITDA. Dividend
yield stands at ~4.8%. Valuing it at 5.5xFY18 our fair value for the stock works out to be Rs
51. We initiate our coverage report on NALCO with Buy rating.
Financial Snapshot (Consolidated)
(Rs mn) FY14 FY15 FY16E FY17E FY18E
Net Sales 67,809 73,828 62,682 68,518 73,648
EBITDA 9,869 17,086 9,072 11,767 13,346
EBITDA Margin (%) 14.6 23.1 14.5 17.2 18.1
APAT 7,444 11,760 7,645 9,617 10,912
EPS (Rs) 2.9 4.6 3.0 3.7 4.2
EPS (% chg) 39.1 58.0 (35.0) 25.8 13.5
ROE (%) 6.2 9.4 5.9 7.3 7.9
P/E (x) 12.8 8.1 12.5 9.9 8.7
EV/EBITDA (x) 5.6 2.9 5.1 3.7 3.0
P/BV (x) 0.8 0.7 0.7 0.7 0.7
Source: Company, Emkay Research
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 2
Investment arguments
NALCO’s - a) superior position amongst peers in terms of cost advantage, better integration and
strategic location, b) profitable alumina segment, c) strong balance sheet with net cash and d)
attractive valuations makes it a good investment idea. In all these parameters, NALCO stands
superior to its domestic peers.
Best positioned amongst domestic peers
NALCO, a Navratna PSU, has a 460 ktpa aluminium smelter capacity, backed by a 2.23 mtpa
alumina refinery supported by a captive bauxite mine (6.8 mtpa) and 1200 MW captive power.
NALCO is best positioned amongst its peers in terms of integration, strategic location, cost
advantage and balance sheet strength. The company has close to 16% domestic share in
Aluminium segment, with higher capacity utilization, it is likely to grow that share. Moreover,
NALCO is net long in alumina, which has been its biggest advantage.
Exhibit 1: NALCO: Capacity of Operating Units
Unit Capacity
Bauxite Mines 6825000 Mt
Alumina Refinery 2275000 Mt
Aluminium Smelter 460000 Mt
Captive Power Plant 1200 MW
Wind Power Plant - I 50.4 MW
Wind Power Plant - II 47.6 MW
Rooftop Solar Power System 260 KWp
Source: Company, Emkay Research
Exhibit 2: Indian Aluminium Capacity & Production (KT)
Company Installed Capacity Production FY15 % Utilization
BALCO 575 324 56%
Vedanta Ltd 550 520 95%
Vedanta Ltd – SEZ 1190 20 2%
NALCO 460 327 71%
HINDALCO 1354 836 62%
Total Primary Production 4129 2026 49%
Source: Industry, Emkay Research
Better integration helps in smooth process
NALCO is a backward integrated producer of aluminium. Good quality bauxite helps in low cost
alumina, which in turn, helps in aluminium production. The 1200 MW coal based captive power
plant helps the aluminium smelting. So far, the company has been primarily sourcing coal from
Coal India through linkage. However, with the company being allotted two coal mines, Utkal- D
and E, we believe, going forward NALCO will be further well integrated. Aluminium being power
intensive industry, coal integration and captive power is vital. NALCO has also ventured into
solar and wind power projects. While NALCO has a total wind power capacity of 98 MW, it has
roof top solar power capacity of 260 KW.
For logistics, NALCO uses its own locomotives and wagons and it has its own mechanized
storage and ship building facilities for exporting calcined alumina and importing caustic soda. It
has aluminium storage capacity of 3x25,000 tonnes.
Strategic location ensures efficient movement of goods
NALCO’s mine, refinery and smelters are located nearby making it economically feasible. A 1800
TPH, single flight, multi-curve cable belt conveyor connects the bauxite mines to the refinery
at Damanjodi, which is just 14.6 km away from the mine. This helps in cutting down costs on
account of freight and also fuel. Strategic location of the refinery near port makes it cost effective
for the company to export alumina.
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 3
Exhibit 3: Proximity to ports help in better logistics
Source: Company, Emkay Research
Cost advantage
NALCO operates at fully mechanized Panchpatmali Hills bauxite mine at Koraput district of
Odisha. This mine is one of the lowest cost mines in the world with cash cost of production of
around US$9/ tonne only. Total resources stand at 310 mt.
Backed by low cost bauxite, the alumina production cost also stays low for NALCO at sub
US$200/ tn. In the global alumina cost curve, this falls in 1st quartile, making NALCO a big
beneficiary.
Along with its efficiency related cost advantages, NALCO also benefits from better integration
and strategic location, which helps in reducing logistics costs to a great extent.
Alumina- the key driver
Unlike its domestic peers, NALCO’s business model is mainly dependent on alumina rather than
aluminium. This has been supportive as demand- supply dynamics in alumina is better than that
in case of the metal. In the long run, this is also true in the context of capacity expansion in
aluminium metal going around the world and singular use of this intermediary commodity.
The pricing scenario has been weak in recent months. Alumina spot prices fell steadily during
CY2015, due to decreasing demand in China, weak aluminium prices and supply growth. As per
some global commodity research houses, spot alumina prices are likely to stay subdued in the
near term due to closure of smelters. However, the 2015 average was forecast at US$339/ tonne,
higher than 2014 level of US$331/ tonne. Recently, in past two months, prices fell sharper than
expectations and the average stands at US$301/ tonne for CY15. NALCO’s average realizations
are better than this, as for CY14, NALCO’s average alumina realizations were US$336/ tonne.
In YTDCY15 the same has been US$319/ tonne. We expect the alumina realizations to remain
weak in H1CY16 and should improve in H2CY16. In fact, alumina prices in medium term are
expected to increase as small-scale operations in China are estimated to expand and is likely to
help removing supply from the market.
According to Alcoa’s latest presentation Alumina is set to be in deficit in CY16 by 2.8 mt.
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 4
Exhibit 4: Alumina is likely to be in deficit by 2.8 mt in CY16: Alcoa
2016 Alumina Balance China Rest of World
Production at Beginning Run Rate 56,807 56,900
Production to be Added/Restarted 3,993 1,610
Production to be Closed/Curtailed -3,615 -2,085
Imports/(Exports) – Full Year 4,400 -4,400
Total Production 61,585 52,025
Demand -62,805 -53,560
Net Balance -1,220 -1,535
Source: Alcoa presentations, Emkay Research
World alumina production is forecast to continue to grow in 2015 supported by new additions to
capacity. However in long run, growing aluminium consumption and production will support the
fundamentals. Some other forecast too suggest that in the longer term, alumina will remain in
deficit.
The companies which are expected to be a part of demand supply chain for Alumina in coming
years are mentioned in below charts.
Exhibit 5: Share of world third party Alumina Demand (Mt)
Source: Industry, Emkay Research
Exhibit 6: Share of world third party Alumina Supply (Mt)
Source: Industry, Emkay Research
0%
10%
20%
30%
40%
02468
101214161820
2013 2015 2017 2019 2021 2023
Dubal Alba Century Vedanta
CPI Yunnan Aluminum Zengshi Xinheng group
Aluar EMAL % of WTD
0%
20%
40%
60%
80%
0
10
20
30
40
2013 2015 2017 2019 2021 2023
Alcoa/AWAC Chalco Jinjiang Group Xinfa Group
BHP Billiton Rio Tinto Alcan Weiqiao Hydro
Nalco ENRC % of WTS
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 5
Price movement in alumina as against aluminium has been more steady in recent years. Alumina
prices, as a percentage of aluminium, has been rising. As per recent data alumina prices have
been hovering at around 14% of the LME, which is lower than the long term average of 17%.
During the month of May, 2015, alumina prices reached 20% of the LME aluminium. Though,
very recently spot alumina prices have drifted down, we believe, it will continue to outperform
aluminium prices. NALCO meanwhile, has already contracted 70% of its alumina at 17.5% of
LME for CY16, which should help the company in reducing the volatility. Any improvement in
LME during the course of time would thus, result into double benefit for the company.
Exhibit 7: Alumina as a percentage of Aluminium LME ($/ tonne)
Source: Company, Emkay Research
NALCO’s market is focused towards the less volatile Middle East
After meeting its captive requirement, NALCO sells its surplus alumina through auction. Since
last 10 years, on an average, exports have been contributing more than 95% of alumina sales.
NALCO predominantly supplies its alumina to the Middle East markets, where it gets better
premium over the South East Asian markets including China due to lesser competition and freight
differential. We understand the demand environment is also better in Middle East compared to
other regions. In that sense, it remains helpful for NALCO.
Exhibit 8: NALCO’s alumina Production trend
Source: Company, Emkay Research
Exhibit 9: Exports as percentage of Nalco’s alumina sales volume
Source: Company, Emkay Research
10%
12%
14%
16%
18%
20%
22%
Nov-1
1
Feb-1
2
Ap
r-12
Jun
-12
Se
p-1
2
Nov-1
2
Jan
-13
Ap
r-13
Jun
-13
Au
g-1
3
Oct
-13
Jan
-14
Mar-
14
May-
14
Au
g-1
4
Oct
-14
Dec-1
4
Mar-
15
May-
15
Jul-1
5
Se
p-1
5
Dec-1
5
1550 1567 15781463 1559 1557 1563 1516
16871802
1925 1851 1934 2002 2093
500
1000
1500
2000
2500
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016e
2017e
2018e
Production (kt)
90%
91%
92%
93%
94%
95%
96%
97%
98%
99%
100%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e
NALCO has already contracted
its 70% alumina volume at 17.5%
of Aluminium LME for CY16
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 6
Superior margins in alumina segment to continue
This is important as it is the alumina segment, which has been making sound profits offsetting
the low profitability/ losses made in smelting business. The segmental EBIT performance can
prove it. During the last eight quarters, the average EBIT margin of the alumina segment has
been 26%. We expect the company to maintain better margins in alumina segment going
forward. Smelter margins improved during FY15 due to better coal availability. Sustaining
positive EBIT margins in aluminium will help the company to see much better performance in
forthcoming quarters. At the EBITDA level however, we don’t expect any meaningful contribution
by aluminium segment in next couple of years, unless there is significant jump in LME.
Exhibit 10: EBIT Margin (%) Alumina vs Aluminium
Source: Company, Emkay Research
Along with superior margins, contribution of alumina segment in total EBIT has been much better
for NALCO. In last 10 years, the average contribution from alumina segment has been 48%.
Electricity and aluminium contributed the rest. During the last five years, contribution of alumina
segment to the total EBIT has been higher at 60%. In 2011, EBIT contribution by alumina fell
towards 16%, however, it rose gradually since then to reach to ~85% in FY13 and FY14 before
falling below 60% in FY15. With capacity addition in alumina segment, we expect EBIT
contribution by alumina segment to continue to increase in future.
Exhibit 11: % EBIT from Alumina for NALCO
Source: Company, Emkay Research
Investing in refinery- a step in right direction
In this regard, it is important to mention that the next major capex spending has been targeted
at commissioning of a new 1 mtpa alumina refinery for Rs 56 bn. The company has been waiting
for commencement of work on this project pending clearance of Pottangi bauxite mine. Recently,
the company has got an in-principle go ahead for the Pottangi bauxite mine from the state
government of Odisha and is waiting for the formal allocation of the mine. We understand that
some procedures are being completed in this regard. This mine with ~75 mt bauxite reserve will
service the upcoming refinery. This is, we believe, a step in the right direction, as alumina is the
most profitable business, where the company plans to expand its capacity.
Smelter utilizations kept lower to counter higher costs
NALCO has a linkage of 4.6 mtpa of coal from Coal India. However, the company suffered losses
during FY12 to FY14 due to high coal costs arising from less than required supply from Coal
India. For 100% utilization of its smelter, it requires 6 mtpa coal. With lesser supply from Coal
India, NALCO had to rely on high cost imports, which resulted in a fall in its profitability. The
company however, took a logical step to cut down the utilization level of the smelter to the extent
it can be supported by the linkage coal availability. In FY15 and H1FY16, with improvement in
-20%
0%
20%
40%
60%
80%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Alumina Margin Aluminium Margin
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 7
coal availability through linkage and also e-auction, the company also has been improving on its
smelter utilizations. With the hope that coal availability through e-auction will be maintained,
NALCO is planning to achieve aluminium metal production of 360- 370 kt in FY16 instead of the
earlier envisaged 320 kt. According to the management, even with a further US$100/ tn fall in
aluminium LME, the company will continue to produce at the targeted rate provided coal is
available through linkage and e-auction. This, we believe, is a good strategy of the company to
control costs.
Exhibit 12: NALCO’s aluminium Production and Utilization
Source: Company, Emkay Research
Coal cost advantage due in next couple of years- a major trigger
NALCO was allotted Utkal- E coal mine in 2004. The company had started basic development
work also and spent Rs 1.3 bn on land acquisition before it was de-allocated by the government,
following a Supreme Court order regarding discrepancy in coal block allocation issue. Recently,
the company was re-allocated the same mine along with another block, Utkal- D. This is should
be seen as a big positive for NALCO. As per available data, together, these two blocks have
347mt (153 mt from Block D and 194 mt from Block E) of coal reserve. According to the
management, substantial work was done in Utkal- D by the previous allottee and thus, NALCO
will develop this block first. This will bring down the coal cost substantially ensuring smooth
supply at the same time. Also, as per the new policy, the PSUs can continue with the linkages
even if they are allotted mines. Considering the volume growth in Coal India, we are confident
that NALCO should get 90- 95% of the linkage quota of 4.6 mtpa. In case of own mine, NALCO
is likely to target ~2 mtpa coal from Utkal- D initially. This will result in substantial cost savings
for the company. Also, the company will able to increase the utilization of the smelter and thereby
improved performance. Currently, on an average basis, linkage coal costs Rs 1600- 1800/ tonne
while, e- auction prices have been hovering at around Rs 3000- 3200/ tn. Against these rates,
we believe, landed costs of coal from own mine not to cross Rs 1000/ tonne. Since, this will
eventually replace e-auction coal, there should be a saving of Rs 2000/ tonne of coal for that
much quantity. For the entire coal usage, this is likely to bring down the coal costs by Rs 500/
tonne of aluminium. This itself can improve EBITDA by ~15%. At present we are not factoring
this into our estimates, as the official allotment of the mines are yet to be done and logistics
issues to transport the coal from the mine to the plant need to get fixed.
Exhibit 13: Average Coal Cost (Rs/ tonne)
Source: Company, Emkay Research
298338 359 359 360 366
431 444413 403
316 327 345 359 368
0%
20%
40%
60%
80%
100%
120%
0
100
200
300
400
500
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016e
2017e
2018e
Production (kt) Utilization (%)
0
500
1000
1500
2000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 8
Strong balance sheet with net cash makes NALCO stand out
Unlike its peers, the biggest advantage for NALCO lies in its balance sheet strength. While its
peers are struggling with huge debt, NALCO has a net cash of Rs 53.3 bn. In fact at the current
CMP of Rs 37/ share, cash contributes more than 50% of the market capitalization. This gives
better room for the required capex spending by the company.
Exhibit 14: Cash per share (Rs mn)
Source: Company, Emkay Research
Exhibit 15: Net Debt for NALCO and its peers for H1FY16 (Rs bn)
Source: Company, Emkay Research
Cash accumulation is likely to continue
As per the management, the FY16 capex is likely to be Rs 7.8- 8 bn. Similar amount is expected
to be spent in FY17 also. Majority of the capex would be spent on the 100 MW wind power plant.
We expect some capex spending to start on Damanjodi refinery also. Most of the other major
capex viz. GMDC, project, NPCL, Sundergarh projects etc are not much in focus due to various
issues. At present, NALCO is free cash flow positive and is likely to generate healthy cash flows
even after paying dividend.
0
10
20
30
40
50
60
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e
-53.3
280.7
423.3
-100
-25
50
125
200
275
350
425
500
NALCO Hindalco (Standalone) Vedanta (Except Cairn, HZL,Zinc Int. and Talwandi Sabo)
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 9
Exhibit 16: Capex
Project Description Investment Current status Likely completion
Wind Power To add 100 MW, to the existing
capacity of 99 MW
Rs 7 bn Company has finalized location,
talking to contractors. Government
of India had reserved Pottangi mine
for NALCO in April-07
By FY17
1 mtpa alumina refinery
stream at Damanjodi,
Odisha
To expand 5th stream which is
linked to the 3 mtpa Pottangi mine
Rs 56 bn Government of Odisha has given
approval, lease is awaited
If mining lease in granted in
FY16, alumina refinery could
be commissioned by FY18
Utkal-D& E Coal Mine,
Odisha
Development of Utkal- E mine which
has 68 mt of reserves
Rs 1.3 bn spent
out of total
budget of Rs 4.8
bn
NALCO has been re-allotted this
mine
Utkal- D mine likely to be
taken up first (FY18) and
then Utkal- E
Caustic Soda Project,
Dahej, Gujarat
To set up 270 ktpa Caustic Soda
plant in Gujarat in a JV with GACL
Rs 7.2 bn Detailed project report including a
captive power plant is being finalized
Beyond FY18
Alumina refinery, Gujarat To set up 1 mtpa greenfield refinery
in Gujarat in a JV with GMDC
Rs 64 bn Discussions with GMDC are on Beyond FY19
Kakrapar Units 3 & 4 To set up 2 X 700 MW Nuclear
power plant in a JV with NPCIL
Rs 135 bn,
NALCO is having
26% stake in JV
Running behind schedule; Work yet
to begin
Beyond FY20
Sundergarh smelter +
Captive Power Plant,
Odisha
To set up 500 ktpa smelter and
1,260 MW captive power plant as
Greenfield project
Rs 200 bn Will go ahead only if a separate coal
block is allotted for CPP
Beyond FY20
Source: Company, Emkay Research
Strong dividend yield makes it more attractive
NALCO has been consistently increasing its dividend per share since FY11. From Re 1/ share
in FY11, it has increased its dividend to Rs 1.75 per share in FY15. We expect the company to
continue with its dividend policy. At CMP this translates to a dividend yield of 4.8%, which looks
attractive on top of its growth prospect.
Exhibit 17: Dividend Yield and DPS
Source: Company, Emkay Research
0%
1%
2%
3%
4%
5%
6%
7%
8%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e
DPS Dividend Yield
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 10
Concerns
Weak aluminium and alumina prices
The biggest concern for the company and risk to our estimates would be aluminium and alumina
prices. Aluminum prices have been hovering near US$1500/ tonne for sometime now, while
physical premium also has fallen sharply over past few months. This has been putting pressure
on all the smelters including NALCO. Alumina prices, so far have been stable, however, recently
fell sharply and if the downtrend sustains, it could be negative for the company.
Lower coal supply in the domestic market
NALCO had already suffered due to lower than required coal supply by Coal India earlier. As the
company had to rely on imports, it put pressure on the margins significantly. At present, the
domestic supply has improved and the company has stopped imports too. However, any short
supply of coal by Coal India will be a major concern for the company.
Delay in coal mining projects
We understand that NALCO has not yet got formal allocation of the Utkal D & E coal mines.
Once it gets them, the challenge will be to start developing those mines. In Utkal- E block full
land acquisition is pending and it might take time. Also, logistics can be a major challenge in this
regard.
Employee costs
Being a PSU, employee costs are very high for NALCO and upcoming wage revision in this
regard would be very important to look at. Significantly higher settlement will raise the costs and
thus will weigh on the margins and profitability.
Cheaper imports from China & Middle East threat for domestic industry
Cheaper import of aluminium from China and Middle East have been a worry for the domestic
producers including NALCO. Share of imports into the domestic consumption has increased from
40% in 2011 to 56% in 2015. Consistent increase in cheap imports will be a major issue for the
aluminium producers.
Poor grade of bauxite at new mine
NALCO’s currently operating mine Panchpatmali has very good quality of bauxite. In Pottangi
mine however, the quality of bauxite may not be very good requiring for higher per unit
consumption and rise in cost structure from the current level.
Overhang of OFS
Presently, the government of India holds 80% in the stock. So, there can still be 5% sale by the
government most likely through OFS. Given the experience of the past OFS in NALCO and other
PSUs, this can be an overhang on the stock.
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 11
Financials
Revenue likely to be back on track in FY18
Sales volumes for Alumina rose by 42% from FY08 to FY15 while volume for Aluminium rose by
25% for same period. As a result, the topline of the company grew at a CAGR of 5.7% during
this period. Realizations also stood firm at US$2410/ tonne in FY15, thanks to stronger physical
premium. Going forward as we see gradual growth in volume and stabilization in Aluminium LME
and Alumina prices, we expect revenue of the company to gradually improve FY17 onwards with
better volume and stabilization in the realizations.
Exhibit 18: After falling in FY16, revenue is likely to gradual improvement
Source: Company, Emkay Research
EBITDA Margin to remain stable
NALCO has been amongst the lowest cost producers of aluminium in the world, resulting into
better EBITDA margins. NALCO had been reporting margins of above 45% till FY11. After this
the margins fell because of significant increase in that the coal cost as the company had to import
coal, as Coal India failed to supply the required quantity. Further, fall in realizations due to decline
in LME also weighed. Since 2012, it has been maintaining EBITDA margin of 20% and we
believe, after a slight decline in FY16, it will continue to improve gradually. In case of segmental
performance, outperformance of alumina segment over aluminium is likely to continue.
Exhibit 19: EBITDA (Rs mn) and EBITDA Margin (%)
Source: Company, Emkay Research
Exhibit 20: NALCO EBIT/ tonne diversification (Rs)
Source: Company, Emkay Research
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e
Revenue (Rs mn)
0%
10%
20%
30%
40%
50%
60%
70%
0
5000
10000
15000
20000
25000
30000
35000
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e
EBITDA EBITDA Margin
(10,000)
-
10,000
20,000
30,000
40,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Alumina EBIT/ tn Aluminium EBIT/ tn
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 12
Profitability to rise further
On the back of better topline growth and better margin, we believe the company should see
better growth in PAT as well. From FY09 to FY15, PAT grew by CAGR of 1%. After falling in
FY16, we expect the PAT to improve gradually. Expected better PAT growth can be attributed
to low fixed costs and improved margins. Other income also is likely to grow with better cash
generation.
Exhibit 21: Net profit (Rs mn) and NPM trend
Source: Company, Emkay Research
ROCE and ROE are likely to improve
With improvement in profitability, return ratios are also likely to improve further. For FY15 the
ROCE was recorded at 15%, which after declining in FY16e is likely to rise back to 10% level
again in FY18e. ROE is also expected to rise to 8% in FY18e and be at par with current levels
of 9%. So the company is efficiently utilizing its capital employed with profitable returns going
forward.
Exhibit 22: ROCE (%)
Source: Company, Emkay Research
Exhibit 23: ROE (%)
Source: Company, Emkay Research
0%
10%
20%
30%
40%
50%
0
5,000
10,000
15,000
20,000
25,000
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016e
2017e
2018e
APAT APAT Margin (%)
0%
5%
10%
15%
20%
25%
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16e
FY
17e
FY
18e
0%
2%
4%
6%
8%
10%
12%
14%
16%
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16e
FY
17e
FY
18e
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 13
Assumptions
We have taken following assumptions for our estimates. We believe, commodity prices and
currencies will remain volatile and thus, subject to change. For aluminium prices, we expect
some gradual improvement going forward.
Exhibit 24: Assumptions for commodity and FX
Assumptions 2014 2015 2016e 2017e 2018e
Aluminium LME (US$/ tonne) 1773 1890 1613 1725 1775
Alumina LME (US$/ tonne) 362 341 275 285 300
Aluminium Sales (000 tonne) 320 326 345 359 368
Alumina Sales (000 tonne) 1343 1225 1244 1284 1357
INR: US$ 50 61 65 65 65
Source: Emkay Research
Sensitivity
Both aluminium and alumina prices along with coal costs are critical for NALCO’s operational
performance. The following exhibits show the sensitivity to prices of aluminium, alumina and coal
on the EBITDA, EPS and target price. Interestingly, impacts are similar in all three cases. As per
the estimates, 1% change in aluminium LME will change EBITDA by 3.3%, 1% change in
alumina prices will affect EBITDA by 2.1% and 1% change in coal costs will change the EBITDA
by 0.9%.
Exhibit 25: Sensitivity to change in Aluminium prices (FY18)
Aluminium LME ($/tn) % Change EBITDA (Rs mn) EPS (Rs) TP (Rs)
1598 -10% 8948 2.97 41
1686 -5% 11147 3.60 46
Base Case = 1775 0% 13346 4.23 51
1864 5% 15545 4.86 55
1953 10% 17744 5.49 60
Source: Emkay Research
Exhibit 26: Sensitivity to change in Alumina prices (FY18)
Alumina LME ($/tn) % Change EBITDA (Rs mn) EPS (Rs) TP (Rs)
270 -10% 10603 3.45 44
285 -5% 11975 3.84 48
Base Case = 300 0% 13346 4.23 51
315 5% 14718 4.63 54
330 10% 16089 5.02 57
Source: Emkay Research
Exhibit 27: Sensitivity to change in Coal prices (FY18)
Avg Coal Cost (Rs/tn) % Change EBITDA (Rs mn) EPS (Rs) TP (Rs)
1557 -10% 14540 4.58 53
1644 -5% 13943 4.41 52
Base Case = 1730 0% 13346 4.23 51
1817 5% 12749 4.06 49
1903 10% 12152 3.89 48
Source: Emkay Research
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 14
Valuation- attractive with div yield of 4.8%
Like many other metals stocks, NALCO has suffered a lot along with the sharp fall in metals
prices. Some company specific issues such as lack of coal availability also weighed on the
performance earlier. With better strategy to cut smelter utilizations and focusing more on alumina
segment along with subsequent improvement in coal supply by Coal India, the company could
overcome most of its challenges. Optimum coal supply by Coal India, both through linkages and
e- auction, is going to be helpful for NALCO going forward. The company will be further benefitted
as and when it starts its own coal mining. On top of this, in near to medium term, any
improvement in aluminium and alumina prices would be a big positive for the company’s
operational performance. AT CMP of Rs 37, the stock discounts its FY16E, FY17E and FY18E
earnings by 12.5x, 9.9x and 8.7x respectively. Also the stock is available at 5.1x FY16E EV/
EBITDA, 3.7x FY17E EV/ EBITDA and 3.0x FY18E EV/ EBITDA. This suggests that the stock is
quite attractively placed in terms of valuation and provides room for substantial upside. At the
CMP, the dividend yield of 4.8% makes it even more attractive. We value the stock at 5.5xFY18
EV/ EBITDA to arrive at a fair value of Rs 51. We initiate our coverage with a Buy rating. Any
improvement in Aluminium LME will provide further upside to our valuation.
Exhibit 28: Valuation Table
Rs (mn) FY18E
EBITDA 13346
EV/EBITDA (x) 5.5
EV 73403
Net Debt -56991
Market Cap 130394
No. of Shares 2577
Fair Value (Rs) 51
Source: Emkay Research
Exhibit 29: P/E Band
Source: Emkay Research, Company
Exhibit 30: EV/EBITDA Band
Source: Emkay Research, Company
Peer comparison
NALCO stands out amongst its global peers as it is trading at low multiples.
Exhibit 31: Peer Valuation
Mcap PER P/BV EV/EBITDA
Company (USD Bn) FY16E FY17E FY16E FY17E FY16E FY17E
Alcoa 9.5 22.1x 12.8x 0.8x 0.7x 7.1x 6.0x
Chalco 8.5 NA NA 0.8x 0.9x 15.1x 16.1x
Hydro 6.7 10.7x 15.6x 0.8x 0.8x 4.4x 5.6x
Rusal 4.5 3.6x 5.4x 1.6x 1.3x 6.1x 9.6x
Hindalco 2.3 11.0x 7.9x 0.4x 0.4x 7.9x 6.7x
Alumina Ltd 2.1 10.9x 27.0x 0.9x 0.9x 32.8x 69.2x
NALCO 1.4 12.5x 9.9x 0.7x 0.7x 5.1x 3.7x
Al Bahrain 1.4 7.2x NA 0.5x 0.6x 3.4x 9.5x
Source: Emkay Research, Bloomberg
0
100
200
300
Jan
-07
Au
g-0
7
Mar-
08
Oct
-08
May-
09
Dec-0
9
Jul-1
0
Feb-1
1
Se
p-1
1
Ap
r-12
Oct
-12
May-
13
Dec-1
3
Jul-1
4
Feb-1
5
Se
p-1
5
10x
4x
12x
8x6x
0
20
40
60
80
100
120
140
Jan
-07
Au
g-0
7
Mar-
08
Se
p-0
8
Ap
r-09
Nov-0
9
May-
10
Dec-1
0
Jun
-11
Jan
-12
Au
g-1
2
Feb-1
3
Se
p-1
3
Mar-
14
Oct
-14
May-
15
Nov-1
5
5x4x3x2x
7x6x
8x9x
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 15
Annexure 1: Company background
NALCO
National Aluminium Company Limited (NALCO) is a Navratna CPSE under Ministry of Mines,
Govt. of India. It was established on 7th January, 1981, with its registered office at Bhubaneswar.
The Company has integrated and diversified operations in mining, metal and power with sales
turnover of Rs 7024 crore in financial year 2013-14. Presently, Government of India holds
80.93% equity of NALCO.
The company has a 68.25 lakh TPA Bauxite Mine & 22.75 lakh TPA Alumina Refinery located
at Damanjodi in Koraput dist. of Odisha, and 4.60 lakh TPA Aluminium Smelter & 1200 MW
Captive Power Plant located at Angul, Odisha. As per diversification plan, NALCO has ventured
into renewable energy sectors. The Company has successfully commissioned two wind power
plants. A 50.4 MW wind power plant at Gandikota, Andhra Pradesh and another of 47.6 MW
wind power plant at Jaisalmer, Rajasthan are operational since December, 2012 and January,
2014 respectively. 260 KWp Rooftop Solar Power System has been made operational at Office
and Township, Bhubaneswar during FY 2014-15.
NALCO has bulk shipment facilities at Vizag port for export of Alumina/Aluminium and import of
caustic soda and also utilises facilities of Kolkata and Paradeep ports. The company has its
regional marketing offices in Delhi, Kolkata, Mumbai & Chennai its branch offices at Bangalore,
Paradeep , Ahmedabad and its 11 stockyards at various locations in the Country.
NALCO is the first Company in Aluminium sector in the Country to venture into International
market in a big way with London Metal Exchange (LME) registration since May, 1989. All the
manufacturing units and the port facility of the Company.
In its efforts for capacity addition and expansion, NALCO has extensive plans for brown field and
green field expansion projects, which include 1 MTPA Alumina Refinery in Gujarat in JV with
Gujarat Mineral Development Corporation (GMDC) (Greenfield), 5th Stream of 1 MTPA capacity
in existing Alumina Refinery at Damanjodi (Brownfield), 0.5 MTPA Aluminium Smelter and 1050
MW Power Complex in Odisha (Greenfield), 0.5 MTPA Aluminium Smelter abroad and
development of bauxite mines at Gudem and KR Konda in Andhra Pradesh and Pottangi in
Odisha etc.
The Company has plans to set up a 2 lakh TPA caustic soda plant in JV with Gujarat Alkalies &
Chemicals Limited (GACL) and 55,000 TPA Aluminium Conductor plant in JV with Power Grid
Corporation of India Limited (PGCIL). The Company has plans to set up a 14MW wind power
plant at mined out area of Damanjodi and another 100MW wind power plant at any suitable
location in the Country.
The company has formed a JV Company with Nuclear Power Corporation of India Limited
(NPCIL) for establishing 2X700 MW Nuclear Power Plants at an estimated investment of Rs.
11,459 crore at Kakrapara in Gujarat. For development of downstream ancillary industries, a JV
Company has been formed with IDCO, Odisha for Angul Aluminium Park.
The company is involved in playing a significant role in the socio-economic development of the
areas where it operates. Rehabilitation of displaced families, employment, income generation &
health care for local people, development of infrastructure, care for environment and various
humanitarian goodwill missions have earned NALCO a place of pride in the corporate world.
With the setting up of NALCO Foundation and doubling of CSR budget to 2% of the net profit,
the company is well-poised to augment its activities on social responsibilities significantly.
In order to promote education amongst tribal children, NALCO has sponsored more than 655
students in reputed educational institutes in Odisha by way of bearing all their expenses on
studies including lodging and boarding etc.
Bauxite Mines
On Panchpatmali hills of Koraput district in Orissa, a fully mechanized opencast mine is in
operation since November, 1985, serving feedstock to Alumina Refinery at Damanjodi located
on the foothills. Present capacity of Mines is 68.25 lakh TPA. Panchpatmali plateau stands at
elevation of 1154 m to 1366 m above mean sea level. Bauxite occurs over the full length of the
Panchpatmali plateau, which spans over 18 kms.
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 16
The salient features:
� Area of deposit - 16 sq. KM
� Resource - 310 million tonnes
� Ore quality - Alumina 45%, Silica 3%
� Mineralogy - Over 90% gibbsitic
� Over burden - 3 meters (average)
� Ore thickness - 14 meters (average)
� Transport - 14.6 KM long, single flight, multi-curve cable belt conveyor of 1800 TPH
capacity
Alumina Refinery
The Alumina Refinery is located at Damanjodi, Odisha, approximately 14 KM from the bauxite
mine at Panchpatmali. The mined-out bauxite is transported from captive mine to refinery by a
14.6 KM long single-light multi-curve 1800 tonnes per hour (TPH) capacity cable belt conveyor.
The alumina produced is transported to aluminium smelter at Angul (Odisha) and to Vizag
(Andhra Pradesh) port by rail. The present capacity of Alumina Refinery is 22.75 lakh TPA.
Alumina produced is used to meet Company's requirements for production of primary aluminium
at smelter. The surplus alumina is sold to third parties in the export markets.
The salient features:
� Atmospheric pressure digestion process
� Pre-desilication and inter-stage cooling for higher productivity
� Energy efficient fluidised bed calciners
� Co-generation of 4x18.5 MW power by use of back pressure turbine in steam generation
plant
Aluminium Smelter
The present capacity of smelter is 4.60 lakh TPA. Alumina is converted into primary aluminium
through a smelting process by using electrolytic reduction. From the pot-line, the molten
aluminium is routed to either the casting units, where the aluminium can be cast into ingots, sow
ingots, tee ingots, billets, wire rods, cast strips and alloy ingots, or to RPU where the molten
aluminium is rolled into various cold-rolled products or cast into aluminium strips. Aluminium
products are sold in the domestic market and also exported through Kolkata, Paradeep & Vizag
ports. NALCO acquired and subsequent merged International Aluminium Products Limited
(IAPL), the 50,000 tpa export-oriented Rolled Products Unit with NALCO. The RPU is integrated
with the Smelter Plant at Angul for production of aluminium cold rolled sheets and coils from
continuous caster route based on the advanced technology of FATA Hunter, Italy. It has also
started production of another variety of rolled product named as chequered sheet with thickness
ranging from 0.60mm to 3.0mm.
The salient features:
� 180 KA cell technology
� Micro-processor based pot regulation system
� Fume treatment plant with dry-scrubbing system for pollution control and fluoride salt
recovery
� Integrated facility for manufacturing carbon anodes, bus bars, anode stems etc.
� Hyper Dense Phase System (HDPS) for alumina feeding.
� 4 x 35 Tonne and 4 x 45 Tonne furnaces and 2 x 15 TPH and 2 x 20 TPH ingot casting
machines
� 4 x 45 Tonne furnaces and 2 x 9.5 TPH wire rod mills
� 2 x 45 Tonne furnaces and 60/42 per drop billet casting machine
� 2 x 1.5 Tonne induction furnace with a 4 TPH alloy ingot casting machine
� 26,000 TPA strip casting machines
� 2 x 45 Tonne furnaces and 9 TPH tee ingot casting machine
� 2 x 45 Tonne furnaces and 20 TPH sow ingot casting facility are being installed
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 17
Annexure 2: Aluminium industry
Domestic demand to gain momentum from 2015-16
Power, automobile and consumer durable sectors to drive long-term demand
During 2009-10 to 2014-15, aluminium demand recorded a 4.8% CAGR, in-line with the growth
recorded by the power and automobile sectors. In 2014-15, demand rose 7% to 1.9 million
tonnes, as demand from the key end-user sectors automobiles, power and consumer durables
(together accounting for 65-70% of domestic demand) improved 7%.
Aluminium demand is likely to rise 7-8% in 2015-16, as demand from key end-user sectors
increase. Over 2014-15 to 2019-20, demand will record 8-9% CAGR, with demand in volume
terms pegged at about 3 million tonnes. The moderate growth rate would be supported by rising
demand from the automobile, power and consumer durable sectors.
Exhibit 32: India: Sector-wise break up of Aluminium consumption
Source: Industry, Emkay Research
Exhibit 33: World: Sector-wise break up of Aluminium consumption
Source: Industry, Emkay Research
Exhibit 34: Indian market moving towards surplus supply
Producer (kt) FY14 FY15 FY16 (E) FY17 (E)
Consumption (Metal+Scrap) 2588 2840 3029 3252
Consumption (Metal excl. scrap) 1849 1975 2189 2452
Metal Production 1734 2050 2986 3294
Surplus (net of scrap imports) -115 75 797 842
Source: Industry, Emkay Research
US and India positive; EU and China to play spoilsport
Global aluminium demand, which increased 6% y-o-y to 53. 3 million tonnes in 2014, is expected
to rise by a slower 4-5% in 2015. The CAGR is projected to remain at 4-5% levels over 2015 to
2017. Between 2015 and 2019 as well, demand is forecasted to clock 4-5% CAGR vis-a-vis
8.2% CAGR during 2009 to 2014.
Exhibit 35: Per capita consumption of Aluminium (Kg/ person)
Source: Industry, Emkay Research
Exhibit 36: Share of Primary producers in domestic consumption
Source: Industry, Emkay Research
32%
9%
8%
38%
4%6% 3%
Transport
Construction
Packaging
Electrical
Consumer Durable
Machinery & Equipment
Others
27%
25%
15%
13%
5%
9%
6%Transport
Construction
Packaging
Electrical
Consumer Durable
Machinery & Equipment
Others
0
5
10
15
20
25
2008 2009 2010 2011 2012 2013 2014
India China World
0%
20%
40%
60%
80%
100%
FY11 FY12 FY13 FY14 FY15
Primary Producer’s Domestic Sale Import’s Share in India
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 18
Exhibit 37: Aluminium Demand Supply Scenario
2016 Aluminum Balance China Rest of World
Production at Beginning Run Rate 31,053 26,968
Production to be Added/Restarted 3,400 1,010
Production to be Closed/Curtailed -2,420 -766
Total Supply 32,033 27,212
Demand -31,217 -29,254
Net Balance 816 -2,042
Source: Alcoa presentations, Emkay Research
The tepid growth is because of a slowdown in investments in the various industries in the
aftermath of the European debt crisis. Also, usage of the metal in China, the largest global
consumer, will decrease as moderate growth in the country's real estate investments will
translate into lower demand for the metal from the construction sector. Demand in Japan will be
sluggish on account of lower demand from the automobile and construction sectors. While the
US has shown relatively better growth, the country accounts for less than 14% of primary
aluminium consumption and less than 5% of the incremental global demand.
Exhibit 38: China produces more than 50% in Al as well; Production breakup for Aluminium (Mt)
Source: Industry, Emkay Research
Exhibit 39: Aluminium physical premium (USD/ tonne)
Source: Bloomberg, Emkay Research
-1
1
3
5
Jan
'12
Mar'12
May'
12
Jul'1
2
Se
p'1
2
Nov'1
2
Jan
'13
Mar'13
May'
13
Jul'1
3
Se
p'1
3
Nov'1
3
Jan
'14
Mar'14
May'
14
Jul'1
4
Se
p'1
4
Nov'1
4
Jan
'15
Mar'15
May'
15
Jul'1
5
Se
p'1
5
Africa North America South America Asia (ex China)
West Europe East & Central Europe Oceania GCC
China ROW
60
160
260
360
460
560
Au
g/1
2
Oct
/12
Dec/1
2
Feb/1
3
Ap
r/13
Jun
/13
Au
g/1
3
Oct
/13
Dec/1
3
Feb/1
4
Ap
r/14
Jun
/14
Au
g/1
4
Oct
/14
Dec/1
4
Feb/1
5
Ap
r/15
Jun
/15
Au
g/1
5
Oct
/15
Dec/1
5
US Midwest Alum. Prem. MB Japan Alum. Ingot Prem.
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 19
Annexure 3: Alumina industry
The Chinese angle
Like other commodities, alumina too is dependent to a great extent on China, where less than
anticipated consumption has impacted the pricing scenario in CY15. As per the estimates, China
is adding up capacities in Aluminium and that will be the key driver for growth in Alumina demand
going forward. Better global prices for Alumina will impact NALCO’s realization directly which is
expected to improve gradually.
Exhibit 40: China leading with 50% production for Alumina; Production breakup (Mt)
Source: Industry, Emkay Research
Exhibit 41: Monthly alumina production in China (mt)
Source: Industry, Emkay Research
Exhibit 42: Monthly alumina imports by China (mt)
Source: Industry, Emkay Research
China has started taking steps towards that by curtailment of its capacities in Alumina as well as
Aluminium to avoid further price fall. According to Alumina Ltd, in 2019, total alumina is likely to
be in deficit of 1.2 mt taking into consideration that China will be in deficit of ~4 mt at that time.
The absolute amount of deficit may vary for different agencies, however, important thing is that
it is likely to increase.
0
2
4
6
8
10
Jan
'12
Mar'12
May'
12
Jul'1
2
Se
p'1
2
Nov'1
2
Jan
'13
Mar'13
May'
13
Jul'1
3
Se
p'1
3
Nov'1
3
Jan
'14
Mar'14
May'
14
Jul'1
4
Se
p'1
4
Nov'1
4
Jan
'15
Mar'15
May'
15
Jul'1
5
Se
p'1
5
Africa & Asia (ex China) North America South America West Europe
East & Central Europe Oceania China
0
1
2
3
4
5
6
Dec-…
Feb-1
1
Ap
r-11
Jun
-11
Au
g-…
Oct
-11
Dec-…
Feb-1
2
Ap
r-12
Jun
-12
Au
g-…
Oct
-12
Dec-…
Feb-1
3
Ap
r-13
Jun
-13
Au
g-…
Oct
-13
Dec-…
Feb-1
4
Ap
r-14
Jun
-14
Au
g-…
Oct
-14
Dec-…
Feb-1
5
Ap
r-15
Jun
-15
Au
g-…
Oct
-15
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Dec-1
0
Feb-1
1
Ap
r-11
Jun
-11
Au
g-1
1
Oct
-11
Jan
-12
Mar-
12
May-
12
Jul-1
2
Se
p-1
2
Nov-1
2
Jan
-13
Ap
r-13
Jun
-13
Au
g-1
3
Oct
-13
Dec-1
3
Mar-
14
May-
14
Jul-1
4
Se
p-1
4
Nov-1
4
Jan
-15
Ap
r-15
Jun
-15
Au
g-1
5
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 20
Exhibit 43: Outlook for near market balance for alumina (mn tonnes)
Source: Alumina Ltd presentations, Company, Emkay Research
Exhibit 44: China 2016 alumina curtailments in thousand tonne
Source: Alcoa presentations, Emkay Research
Exhibit 45: China 2016 aluminum curtailments in thousand tonne
Source: Alcoa presentations, Emkay Research
4.9 4.84.2
4.83.7
2.7
-5.1-4.6 -4.8
-5.5-4.2 -3.9
-0.2
0.2
-0.6 -0.7 -0.5-1.2
-6
-4
-2
0
2
4
6
2014 2015 2016 2017 2018 2019
ROW China Global
-1590
-900
-675
-300 -150
-3615
-4000
-3500
-3000
-2500
-2000
-1500
-1000
-500
0
Henan Shandong Shanxi I.Mongolia Sichuan Total
6,700 Kmt annualized has been announced
-450
-321
-313
-248
-232-191
-183
-482
-2420
-2500
-2000
-1500
-1000
-500
0
Gansu Ningxia Yunnan Qinghai Henan Sichuan Liaoning Other Total
3,900 Kmt annualized has been announced
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 21
Exhibit 46: Alumina: Planned expansions (2015 - 2019)
Region Country Company Location 2015 2016 2017 2018 2019 Type Comments Bauxite
Integrated
Latin
America
Brazil Norsk Hydro Alumina do Para 1,860 Greenfield The 1.86mt project has
been shelved by the
company awaiting
better “market
conditions”.
Yes
Brazil Votorantim
Group
Alumina Rondon 3,000 Greenfield Passed the first stage of
the environmental
licensing. Looking
for JV partners.
Yes
Middle
East
Saudi
Arabia
Alcoa-Ma'aden Ras Al Khair 1,800 Greenfield First alumina produced
in Q4 2014. Ramping up
in 2015.
Yes
UAE Emirates
Global
Aluminum
KIZAD, Al
Taweelah
2,000 Greenfield Project feasibility
studies completed. First
phase of 2.0 million
tpa planned to be ready
by 2017. Phase II could
double capacity to 4.0
million tpy.
NO
Asia
ex. China
India NALCO Damanjodi 1,000 Brownfield Approval for mining
lease received from
Govt of Odisha. DPR
under study
Yes
Anrak Anrak Alumina 1,500 Greenfield Commissioning has
been delayed several
times amid financial
and bauxite supply
issues and not expected
to start production
until 2016 at the
earliest.
Yes
Vedanta Lanjigarh 2,035 Brownfield The expansion is on
hold due to inability to
secure long term
bauxite supply.
Yes
Indonesia PT Antam Mempawah,
West Kalimantan
Greenfield The 1.2 million tpa
project was reported
being cancelled as it
only received half of the
planned state capital
injection of funds. The
project was planned to
start production in 2016.
Yes
Hongqiao Well
Harvest
Winning
Alumina
Ketapang,
West Kalimatan
1,000 1,000 Greenfield First 1million tpa phase
scheduled to start by
the end of 2015.
Second 1million tpa
phase scheduled for
2017.
Yes
China China Various
Brownfield
Various 1,000 800 600 0 0 Brownfield Yes
Various
Greenfield
Various 5,000 4,400 0 7,200 800 Greenfield Yes
Total World 8,800 7,700 6,600 11,095 800
Total China 6,000 5,200 600 7,200 800
Total ROW 2,800 2,500 6,000 3,895 0
Source: Alcoa presentations, Company, Emkay Research
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 22
Key Financials (Consolidated)
Income Statement
Y/E Mar (Rs mn) FY14 FY15 FY16E FY17E FY18E
Net Sales 67,809 73,828 62,682 68,518 73,648
Expenditure 57,940 56,742 53,610 56,751 60,302
EBITDA 9,869 17,086 9,072 11,767 13,346
Depreciation 5,247 4,137 4,795 5,005 5,215
EBIT 4,622 12,950 4,276 6,762 8,131
Other Income 5,577 6,726 6,341 6,595 7,025
Interest expenses 0 0 0 0 0
PBT 10,199 19,676 10,617 13,357 15,156
Tax 2,755 7,916 2,973 3,740 4,244
Extraordinary Items (494) 1,484 0 0 0
Minority Int./Income from Assoc. 0 0 0 0 0
Reported Net Income 6,950 13,245 7,645 9,617 10,912
Adjusted PAT 7,444 11,760 7,645 9,617 10,912
Balance Sheet
Y/E Mar (Rs mn) FY14 FY15 FY16E FY17E FY18E
Equity share capital 12,886 12,886 12,886 12,886 12,886
Reserves & surplus 108,338 115,087 117,454 121,794 127,430
Net worth 121,225 127,973 130,341 134,681 140,316
Minority Interest 0 0 0 0 0
Loan Funds 0 0 0 0 0
Net deferred tax liability 9,101 11,053 11,053 11,053 11,053
Total Liabilities 130,326 139,026 141,393 145,733 151,369
Net block 67,919 66,454 68,659 70,653 72,438
Investment 12,450 9,510 8,500 8,500 8,500
Current Assets 77,428 80,315 82,503 86,216 92,727
Cash & bank balance 40,483 46,280 49,359 51,676 55,601
Other Current Assets 0 0 0 0 0
Current liabilities & Provision 35,159 22,751 24,766 27,134 30,794
Net current assets 42,269 57,564 57,737 59,083 61,933
Misc. exp 0 0 0 0 0
Total Assets 130,326 139,026 141,393 145,733 151,369
Cash Flow
Y/E Mar (Rs mn) FY14 FY15 FY16E FY17E FY18E
PBT (Ex-Other income) (NI+Dep) 9,178 21,134 10,617 13,357 15,156
Other Non-Cash items (4,395) (5,227) 0 0 0
Chg in working cap 3,379 (9,925) 2,905 972 1,074
Operating Cashflow 9,813 5,205 15,345 15,594 17,202
Capital expenditure (6,187) (3,031) (8,000) (8,000) (8,000)
Free Cash Flow 3,627 2,173 7,345 7,594 9,202
Investments 2,450 2,940 1,010 0 0
Other Investing Cash Flow 0 0 0 0 0
Investing Cashflow 781 5,657 (6,990) (8,000) (8,000)
Equity Capital Raised 0 0 0 0 0
Loans Taken / (Repaid) 0 0 0 0 0
Dividend paid (incl tax) (5,155) (5,065) (5,277) (5,277) (5,277)
Other Financing Cash Flow 0 0 0 0 0
Financing Cashflow (5,155) (5,065) (5,277) (5,277) (5,277)
Net chg in cash 5,439 5,797 3,079 2,317 3,925
Opening cash position 35,044 40,483 46,280 49,359 51,676
Closing cash position 40,483 46,280 49,359 51,676 55,601
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 23
Key Ratios
Profitability (%) FY14 FY15 FY16E FY17E FY18E
EBITDA Margin 14.6 23.1 14.5 17.2 18.1
EBIT Margin 6.8 17.5 6.8 9.9 11.0
Effective Tax Rate 27.0 40.2 28.0 28.0 28.0
Net Margin 11.0 15.9 12.2 14.0 14.8
ROCE 7.9 14.6 7.6 9.3 10.2
ROE 6.2 9.4 5.9 7.3 7.9
RoIC 6.7 17.6 5.5 8.7 10.4
Per Share Data (Rs) FY14 FY15 FY16E FY17E FY18E
EPS 2.9 4.6 3.0 3.7 4.2
CEPS 4.9 6.2 4.8 5.7 6.3
BVPS 47.0 49.7 50.6 52.3 54.4
DPS 1.5 1.8 1.8 1.8 1.8
Valuations (x) FY14 FY15 FY16E FY17E FY18E
PER 12.8 8.1 12.5 9.9 8.7
P/CEPS 7.5 6.0 7.7 6.5 5.9
P/BV 0.8 0.7 0.7 0.7 0.7
EV / Sales 0.8 0.7 0.7 0.6 0.5
EV / EBITDA 5.6 2.9 5.1 3.7 3.0
Dividend Yield (%) 4.1 4.8 4.8 4.8 4.8
Gearing Ratio (x) FY14 FY15 FY16E FY17E FY18E
Net Debt/ Equity (0.3) (0.4) (0.4) (0.4) (0.4)
Net Debt/EBIDTA (4.1) (2.7) (5.4) (4.4) (4.2)
Working Cap Cycle (days) 9.6 55.8 48.8 39.5 31.4
Growth (%) FY14 FY15 FY16E FY17E FY18E
Revenue (2.0) 8.9 (15.1) 9.3 7.5
EBITDA 16.2 73.1 (46.9) 29.7 13.4
EBIT 34.5 180.2 (67.0) 58.1 20.2
PAT 29.9 90.6 (42.3) 25.8 13.5
Quarterly (Rs mn) Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16
Revenue 19,955 19,060 18,013 14,913 18,151
EBITDA 4,743 5,272 4,280 2,237 3,393
EBITDA Margin (%) 23.8 27.7 23.8 15.0 18.7
PAT 3,415 3,545 3,549 1,634 2,261
EPS (Rs) 1.3 1.4 1.4 0.6 0.9
Shareholding Pattern (%) Sep-14 Dec-14 Mar-15 Jun-15 Sep-15
Promoters 80.9 80.9 80.9 80.9 80.9
FIIs 3.9 3.8 3.6 3.4 2.9
DIIs 9.4 9.5 9.7 9.6 9.5
Public and Others 5.8 5.8 5.8 6.1 6.7
National Aluminium Co (NACL IN) India Equity Research | Initiating Coverage
Emkay Research | January 15, 2016 24
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