Brokerage firm Kotak Institutional Equities has downgraded the stock of National Aluminium Company (Nalco) to 'sell' from 'reduce' with an unchanged fair value (target price) of ₹70.
"We see unfavourable risk-reward in Nalco after the recent rally, given (1) range-bound earnings over FY2023-25E as we see limited upside in aluminium prices, along with persistent cost pressures in the alumina division, (2) negative FCF over FY2023-25E due to Capex for the alumina refinery, which is a return dilutive, and (3) expensive valuation at current 6.5-7 times EV/EBITDA FY2024-25E," said Kotak.
Nalco shares have strongly underperformed the metal index and benchmark Sensex in the last one year.
Data show that the stock has lost almost 27 percent in the last one year against a 5 percent gain in the BSE Metal index and an over 2 percent fall in benchmark Sensex.
Kotak pointed out there has been limited progress on Nalco’s two captive coal blocks and 1 mtpa refinery expansion in the last two years.
The brokerage firm expects captive coal mining to start in FY2025E and benefits to be back-ended as (1) the finalization of R&R benefits is pending in the case of the Utkal D coal block and (2) the Utkal E coal block is yet to receive stage II forest clearance.
Moreover, the brokerage said alumina prices have been under pressure, with prices in the range of 12-14 percent of LME aluminium against a long-term average of 18 percent.
"We expect prices to continue to underperform aluminium prices. The third-party alumina market is shrinking with investments in backward integration. We find Nalco’s 1 mtpa refinery project as return-dilutive, with a ROCE (return on capital employed) of just 5-6 percent," said the brokerage firm.
"Nalco expects to commission the plant in FY2024E; however, we expect 12-18 months of delay given limited progress, with less than 5 percent of Capex spent till FY22 and risk of cost overruns," Kotak added.
Aluminium prices have rallied strongly in the last two months, led by optimism on Chinese reopening and a general retracement of the USD. Spreads have increased to a six-month high or at mid-2022 level, Kotak highlighted.
However, the brokerage firm added that the cost support and supply risk have faded with a decline in energy prices.
"We see limited risk of a further supply curtailment with declining cost support as spot prices are at the 90-95 percent percentile of the cost curve after a 27 percent/56 percent correction in seaborne thermal coal/gas prices in Europe in the last three months," said Kotak.
The brokerage firm estimates the market will revert to a balanced state in 2023 after being in deficit over CY2021-22, given the lower demand forecast and stable supply.
Kotak expects prices to remain range-bound at current levels and forecasts aluminium prices of $2450/2400/ton for FY2024/25E.
It expects Nalco's margins to remain under pressure in the near term due to elevated cost pressures arising from higher coal and caustic soda prices.
"Nalco should see negative FCF over FY2023-25E, with a pick-up in growth Capex, which would use all its surplus cash. We revise our EBITDA estimates by -2 percent/+6 percent for FY2024/FY2025E due to our revised rupee forecast. Our earnings are 39 percent/25 percent/22 percent lower than consensus earnings at the EBITDA level for FY2023/24/25E," said Kotak.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.
