National Aluminium Company Stock Research Report

Benefitting from the supply crunch…..

NALCO’s Q2FY25 performance was significantly ahead of street estimates. Key points: 1) Profitability of both alumina and aluminium (Al) divisions improved YoY; 2) alumina price surge aided profitability; 3) Al profitability declined slightly QoQ due to lower LME prices and higher power cost; 4) Board has recommended an interim dividend of INR 4/sh in Q2FY25. Taking cognisance of massive surge in alumina prices, up 30% from Q2 average amidst supply disruption from Guinea and elsewhere, we raise our FY25/26E alumina price by 34%/28% vs earlier estimates to USD 562/te/ USD 576/te. As a result, our FY25/26E EBITDA is up 59%/67%. Our revised TP works out to INR 235 on an unchanged 5.5x FY26E EBITDA. Upgrade to ADD.

Q2FY25 performance overshoots estimates

NALCO’s Q2FY25 EBITDA of INR 15.5bn (up 291% YoY) was 67% and 12% ahead of street and our estimates, respectively. Key points: 1) External alumina sales volume surged 187% QoQ (24% YoY) at 285kte while aluminium sales volume rose 3.3% YoY (16% QoQ) to 121kte; 2) implied alumina EBIT/te rose 253% YoY to USD 209 on the back of 43% YoY surge in realisation; 3) implied Al EBIT/te was up 240% YoY at USD 714 mainly on lower power cost. That said, lower LME Al price and higher power cost (QoQ) resulted in 17% QoQ decline; and 4) power and fuel cost declined 23% YoY to INR 8.1bn due to captive coal from Utkal D block, though on QoQ basis, it was up 18%, possibly due to lower production/despatches. Going ahead, we expect NALCO to continue benefitting from elevated alumina prices and hence, alumina division is likely to be the chief driver of profitability.

Alumina price surge is likely to persist in medium term

The suspension of bauxite exports by Guinea in Oct’24 has exacerbated the supply constraints in the alumina market from: 1) Alcoa’s closure of its Kwinana refinery in Australia; 2) Rio Tinto’s declaration of force majeure at its Queensland refineries due to gas shortages; and 3) supply limitations in China due to bauxite shortages amid environmental inspections. Guinea, having exported 14.1mt of bauxite last year, plays a crucial role globally, translating into ~6-7mt of alumina (total market size: 137mt). We expect alumina market to remain tight in medium term, keeping the prices elevated.

Outlook: Key beneficiary of alumina price uptick

In our view, NALCO, having the highest exposure to alumina among peers, is the key beneficiary of elevated alumina prices. In its Q3CY24 earnings call, Alcoa management mentioned that market is expected to stay tight until Mar’25. Besides, supply growth in CY25 is reliant on schedule of projects in Indonesia, India and resolution of disruptions. Besides, Chinese domestic bauxite supply stays constrained and seaborne imports remain high. As a result, we have revised our FY25/26E alumina price estimates by a hefty 34%/28% compared to our earlier estimates to USD 562/te/ USD 576/te, respectively. As a result, our FY25/26E EBITDA is up 59%/67%. Our revised TP works out to INR 235 (earlier INR 145) on an unchanged 5.5x FY26E EBITDA. We have kept the multiple unchanged as our revised alumina prices are still lower than the current price of USD 693/te. We upgrade NALCO to ADD (from Sell).