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Shares of state owned National Aluminum Company (Nalco) slumped 2.26 per cent at Rs 244.25 a piece on the BSE in the intraday trade of Wednesday. This came after domestic brokerage firm Kotak Institutional Securities downgraded the shares to ‘Reduce’ from their ‘Add’ rating earlier.
The brokerage said that the stock price of Nalco has rallied sharply, following a 45 per cent rally in the alumina prices in the past two months. The ‘Navratna’ public sector undertaking is in the business of manufacturing and selling alumina and aluminum.
Alumina, the starting material for aluminium metal hit a record high of $768 per ton led by several supply disruptions in an illiquid third-party alumina market and record aluminum production.
“We argue that the current alumina deficit is temporary and we expect the market to reverse into a surplus in CY2025E, led by new capacity ramp-up and easing demand as China is fast approaching its aluminum capacity. NACL’s recent rally
captures the near-term earning windfall and lacks further steam. We downgrade to REDUCE (from ADD) as risk-reward is no longer attractive,” said Subhadip Mitra, Vijay Bhasin, and Vikram Datwani of Kotak Institutional Securities.
The brokerage expects alumina supply to gradually normalise over the first quarter of calendar year (CY) 2025, estimating 11-12 mtpa of new alumina refinery capacity, mainly in China, to be commissioned in CY2025.
Further analysts predicted that the alumina prices would correct back to $450 per ton in FY2026E, which is 40 per cent below spot prices, given the structural surplus market in the medium to long term.
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According they have increased earnings before interest, tax, depreciation, and amortisation (Ebitda) estimates of Nalco for FY2025E by 10 per cent, factoring in the recent price strength in alumina and trimmed FY2027 Ebitda on lower alumina volumes.
Aluminum—facing cost pressure
The brokerage noted that aluminium is facing cost pressures as aluminum prices, at $2,600-2,650 per ton, have been rangebound in the past two months, notwithstanding the alumina cost push due to challenging near-term fundamentals.
Aluminum production has been outperforming demand, mainly due to easing of power restrictions in China. A surplus aluminum market led to aluminium spreads contracting to $700/ton from $1,000/ton in September 2024 and five-year average of $900/ton.
However, the analysts believe that the production growth will ease in CY2025, given high utilization, amid the capacity cap in China and limited expansions outside China.
“We believe the alumina prices and spot earnings are at peak and expect a reversal in alumina prices in CY2025E to act as a negative catalyst for NACL. The stock, at 7.3X/6.5X EV/EBITDA on FY2026/27E, appears fairly priced and lacks further structural drivers,” analysts at KIE said.
At 1:15 PM; the shares of the company were trading 1.76 per cent lower at Rs 212.50 a piece. By comparison, the BSE Sensex was up 0.51 per cent at 80,412.77 level.
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