Recommendation From Aluminium Sector

This section gives a recommendation of a stock having stock margin padding price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon

National Aluminium Company Ltd. 

INTEGRATED BUSINESS MODEL MAKES NALCO A LUCRATIVE BET 

HERE IS WHY
Low cost of production
Well-integrated business model
Growth prospects 

National Aluminium Company Ltd. (Nalco) is a Navratna CPSE under the Ministry of Mines. Its operations are integrated and diversified across the fields of mining, metal and power. 

On the standalone front, the total income from operations stood at Rs.2,766.20 crore in Q4FY19 as against Rs.2,863.16 crore in Q4FY18, posting a YoY fall of 3.38 per cent. The company reported EBITDA of Rs.517.55 crore in Q4FY19 versus Rs.489.67 crore in Q4FY18, thereby rising 5.69 per cent. Operating profit rose to Rs.517 crore in Q4FY19 from Rs.490 crore in Q4FY18, posting a growth of 5.51 per cent. Net profit dropped to Rs.233.59 crore in Q4FY19 from Rs.257.06 crore in Q4FY18, thereby sinking 9.13 per cent. The drop in PAT was due to a provision of Rs.91 crore. 

On the consolidated financial front, the company reported total income from operations of Rs.11,499.32 crore in FY19 as against Rs.9,618.31 crore in FY18, posting a growth of 19.55 per cent. EBITDA showcased a growth of 25.7 per cent as it climbed to Rs.2,956.1 crore in FY19 from Rs.1,678.3 crore in FY18. EBITDA margin rose to 18.7 per cent in FY19 from 17.1 per cent in FY18. Net profit increased to Rs.1,732.40 crore in FY19 from Rs.1,342.41 crore in FY18, an increase of 29.05 per cent. EPS soared to Rs.9.07 in FY19 from Rs.6.94 in FY18, registering an increase of 30.69 per cent. 

The lower alumina/LME priced exerted pressure on margins. The production of alumina rose 4 per cent QoQ to 561KT. Meanwhile, the production of aluminum increased 2 per cent QoQ to 111KT and its sales surged 13 per cent QoQ to 117KT. However, lower SME prices resulted in a drop in realisations of 9 per cent QoQ to USD 2,075/tonne. Nonetheless, the reduction in fuel costs as well as scale benefits resulted in an 11 per cent QoQ drop in cost of production to USD 1,842/tonne. 

The prices of alumina are close to their marginal cost of around USD 350/tonne. This limits the potential for further downside. Thus, we can expect some recovery in prices from these levels. Nalco is well-positioned to benefit from such price rises. Furthermore, the restart of Hydro’s Alunorte refinery can add around 2 to 3 MTPA of low-cost alumina in the market. 

The company’s integrated business model makes it a lucrative investment option. Due to its access to high quality bauxite and coal mines, it boasts of one of the lowest costs of production in the world. Its 1,200-MW captive power plant aids in keeping production costs low. With its caustic soda joint venture commencing operations in 2019-20, Nalco will be assured a supply of around 50,000MT of this raw material. 

Overall, the company grew 29 per cent YoY to Rs.1,732 crore in FY19. Nalco is one of the few metal companies that boasts of free cash flows (FCFs). It has showcased a liberal trend when it comes to payment of dividend and share buybacks. Its healthy cash position reinforces our confidence that this trend will continue in the upcoming quarters. By virtue of these factors, we urge our reader-investors to BUY this stock.


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