Alumina to lead the show for National Aluminium Company

Better sales volumes and sales realisations, good show of alumina segment, to drive net profit

As base metal prices improved and the tide turned favourable, National Aluminium Company (Nalco) saw its stock price more than double over the last one year. Although the December quarter (Q3) performance was slightly lower than expected, analysts are not worried and expect the numbers to improve going ahead, led by the alumina business.

Being the lowest-cost producer of alumina on account of its high-grade captive mines, Nalco continues to reap the benefits. In fact, improving sales volumes and realisation from pertonne sale in alumina segment drove Nalco's performance in Q3. The company saw its earnings before interest, tax, depreciation and amortisation (Ebitda) more than double in Q3 (up 109 per cent year over year) to ~285 crore. Operating profit margin at 14.3 per cent was the highest in the last five quarters.

Average pertonne alumina prices at $269 in Q3 were marginally higher than $263 a year ago, but with spot prices shooting up to $340, benefits will be seen in coming quarters. Production also continued to grow, up 27 per cent sequentially and nine per cent year over year, to its best ever at 566,000 tonnes. As realisations are yet to improve, lower alumina exports led to some disappointment, and weighed on overall performance. Nevertheless, analysts remain positive on the segment's prospects due to lower cost of production (down 10 per cent sequentially to $100 a tonne) and improving benefits of scale.

Nalco lags behind its peers in aluminium business due to elevated cost of production on account of higher power and fuel costs. Aluminium segment's performance continues to disappoint even as the element's per-tonne prices are up at $1,710 on London Metal Exchange in Q3, higher than $1,495 a year ago. Production at 99,000 tonnes also increased slightly from 95,000 tonnes a year ago. So, the segment's earnings before interest and tax (Ebit) at ~11.46 crore did not impress much.

Total sales came at ~1,988 crore, up 21.6 per cent year over year. Other income at ~759 crore declined significantly from ~1,240 crore a year ago as Nalco used cash for buyback of shares. Also, there was an exceptional charge of ~37 crore due to entry tax on imports. Yet, net profit at ~144 crore grew 40 per cent sequentially and 71 per cent year over year, led by alumina segment.

Led by alumina segment, analysts expect strong net profit growth for Nalco. Those at Motilal Oswal Securities expect metal production to increase from 372,000 tonnes in FY16 to 448,000 tonnes by FY18, and have raised stock target price to ~83, for the stock trading at ~65 levels.