Nalco’s capex plans may hit cash flows

National Aluminium Company Ltd (Nalco) is going ahead with an extensive expansion plan that would lead to restrictions in cash flows and even a possible increase in debt, say analysts. The outgo for the alumina refinery expansion is ₹6,000 crore.

“We estimate negative free cash flow in FY2021-23 as it would use all its surplus cash and Nalco would require to raise debt in FY2023 to continue its expansion spends,” said Kotak Institutional Equities.

The strain on cash flows could also cut clean into its high dividend yields in the coming years. Nalco’s dividend yield works out to about 4.2% based on payouts it made in FY20.

One positive is that the market dynamics for the aluminium sector appear to be improving. Aluminium prices so far this financial year have stepped up about 20% in international markets, and this could shore up Nalco’s profits.

Demand from China has been steady, while the weak US dollar could continue to support prices.

But one worry for the aluminium market is high inventory. “A surplus market and weak costs should cap further upside in aluminium prices. The market remains well supplied despite the disruption at Alunorte, Brazil, and we see limited upside,” said Kotak’s analysts in the report.

Of course, analysts have already raised expectations of earnings in FY21, supported by the lower base and expected better realizations. Valuations, however, continue to be on the higher side; and a lack of positive surprises coupled with strained cash flows could weigh on the stock.