COMMENT-Low-cost producer Nalco’s Offer for Sale is worth a look
While the cost structure is certainly an advantage in the down cycle, today the LME aluminium price is well above Nalco’s cost of production.
Jitendra Kumar Gupta
Unlike its peers, who were posting huge losses during the crash in LME metal prices last year as a result of the Chinese crisis, National Aluminium Co. (Nalco), was sailing smoothly. This was because of its cost structure -- one of the lowest-cost producers in the world and a strong balance sheet (zero debt on the books). The average cost of production of Indian companies is around USD 1,700 a tonne. Globally, only one third of aluminium producers boast a cost of production below USD 2,000 a tonne.
While the cost structure is certainly an advantage in the down cycle, today the LME aluminium price is well above Nalco’s cost of production. On average in Q4FY17, the LME aluminum prices have stayed at USD 1,848 a tonne as against a low of USD 1,495 a tonne in Q3FY16, an increase of 24 percent. Currently, LME aluminium prices at USD 1,915 are way ahead of company’s cost and a strong signal that earnings should get a boost as a result of operating leverage. Nalco is expected to make annual earnings growth of 22 percent over the next two financial years.
This is also reflected in sentiment as most of the analysts on the Street are valuing its shares at around Rs 85 a share – a multiple of 6 times enterprise value to operating profit of FY19.
Thankfully, after the announcement of the government’s 10 percent divestment in the company through the OFS route at 67 a share, Nalco’s share prices have corrected. Even after a 7 percent correction, its stock at Rs 69 is still trading above the OFS price. At the offer price of Rs 67 it is attractively valued at 11 times its FY19 earnings and 4.6 times enterprise value (EV) to operating profits (EBITDA). What is more, it is offering a dividend yield of close to 3 percent at the offer price.
Nalco, a fully integrated aluminum producer having captive bauxite mines, is sitting on huge cash reserves. Among the government-owned companies, it was early in announcing a buy back last year using its cash and reduced its equity to 193.3 crore shares from 257 crore shares.Even after the buyback, the company is still sitting on cash and cash equivalent of close to Rs 2,700 crore or Rs 14 a share, which is expected to reach to around Rs 3,700 crore or Rs 19 a share, 28 percent of the offer price.