Neutral Nalco; target of Rs 70: Motilal Oswal

Motilal Oswal's research report on Nalco

Consolidated sales fell 3% YoY and 8% QoQ to INR34.9b in 2QFY23. Sales were 16% ahead of our estimate, led by higher than expected Alumina sales volume. Alumina sales volume rose 26% YoY and 79% QoQ to ~400kt, while aluminum sales fell 13% YoY and 11% QoQ to 109kt. We believe NACL has been carrying excess alumina inventory, which has been liquidated in 2QFY23. Alumina ASP fell 9% YoY and 20% QoQ to USD371/t in 2QFY23 on falling LME alumina prices. Aluminum ASP fell 6% YoY and 15% QoQ to USD2,660/t. Both alumina and aluminum ASP were in line with our estimates. Consolidated EBITDA fell 70% YoY and 62% QoQ to INR3.3b, 37% lower than our estimate of INR5.3b. Higher power and fuel costs and other manufacturing expenses impacted margin, which collapsed to 9.6% v/s 23% in 1QFY23. We do not expect any meaningful recovery in margin in the near term.

Outlook

We note that the current valuations are reasonably pricing a slowdown in earnings while leaving open the possibility of an upside that may arise out of China’s economic stimulus or imposition of an aluminum trading ban by the LME on RUSAL. We accordingly downgrade the stock to Neutral with a revised TP of INR70 (from INR86 earlier), valuing the stock at 5x FY23E EV/EBITDA.

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Nalco - 10 -11-2022 - moti