National Aluminium Company Limited (Nalco) reported a weak set of numbers in Q3’09, mainly on account of lower sales due to declining demand.
Net sales fell 6.6% y-o-y to Rs10.4 billion because of a 14.9% y-o-y decline in the aluminium sales volume to ~75,000 tonnes. EBITDA plunged 39.7% y-o-y mainly on account of higher input costs.
We believe that aluminium prices will be in the range of $1,400–1,600 per tonne in FY10.
LME aluminium prices have declined ~60% since July 2008, and we do not foresee any price recovery in the near term as the automobile, infrastructure, and packaging industries (which drive more than two-thirds of the global aluminium demand) are witnessing a recession.
In addition, inventory levels at the LME have reached 3 million tonnes, mainly on account of lower demand. Thus, amidst the weak global demand and rising inventory levels, aluminium prices on the LME are expected to remain subdued in FY10.
We expect the company’s operating cost to decline by 18–20% in FY10, primarily due to falling power and fuel costs.
However, we believe that the expected lower realizations will overshadow the benefit resulting from reduced operating costs. Thus, we expect EBITDA margin to be ~32% in FY09 and ~25% in FY10, compared with 43.9% in FY08.
At Rs198.15, Nalco is trading at a forward P/E of 12x and 19.4x for FY09 and FY10 earnings, respectively. Based on DCF valuation, we have arrived at a target price of Rs149 (assuming a 16.8% WACC and a 5% terminal growth rate).
Since our target price provides a downside potential of 25% from the CMP, we have downgraded our rating from Hold to SELL.