Correction in Nalco an opportunity for investors

Improving alumina, aluminium volumes, realisation point to strong prospects

The government started its FY18 divestment process with up to 10 per cent stake sale in National Aluminium Company or Nalco, on Wednesday. With the floor price at Rs 67 compared to the stock’s closing of Rs 73 on Tuesday, the stock fell seven per cent. Though near-term pressure due to geo-political events could pressure base metal prices, longer-term outlook remains firm. And now, with divestment behind, the road ahead looks good.

Nalco has seen strong turnaround in prospects, with base metal prices rallying on London Metal Exchange (LME) during 15 months. Tonne price of aluminium surged from sub-$1,500 on LME at the start of 2016 to $1,960 last month-end. Nalco’s stock price has rallied from lows of Rs 31.6 to highs of Rs 79.8 during this period. Prices of alumina (a key ingredient to make aluminium) have improved and at $341 a tonne in March quarter are up 56 per cent year over year. 

Thanks to its high-grade captive bauxite mines, Nalco continues to be the lowest-cost producer of alumina. It has cut production cost to $210 a tonne compared to global benchmark of $220-230. The company is working on costs further and increased captive coal may drive benefits. The company has signed allocation agreement for two coal blocks (capacity 200 million tonnes). The coal production from Utkal D mine could start in two years and analysts at HDFC Securities see further reduction in production costs by Rs 500 a tonne. 

The rising energy security will also benefit its aluminium segment, which in the past had seen its profitability getting impacted due to coal costs. For now, better aluminium realisations are accruing benefits. The possibility of minimum import price on aluminium products could help players like Nalco further boost realisations and margins. There are also talks of China planning halt of aluminium plants violating 2015 rules and any output cut from China will push aluminium prices.

 

For the quarter ended March, LME aluminium prices were up eight per cent sequentially to $1,848 a tonne. Analysts at Motilal Oswal say the company’s operating profit will more than double sequentially to Rs 530 crore on higher aluminium and alumina realisations and higher alumina volumes as they expect Nalco, along with Vedanta and Tata Steel, to outperform in the metals pack. While improving financials bode well for Nalco’s earnings, strong and consistent dividend yield is an added positive. Corrections, as the current one, offer opportunity for investors, who can also participate in the offer for sale that closes on Thursday.