Markets
Can Nalco beat aluminium price fluctuations?
Summary
- The public sector undertaking plans to expand its alumina production capacity by 25% from the first half of FY26 to cut its production costs and lessen the impact of volatile aluminium prices on its profitability. But many prior projects have faced significant delays.
National Aluminium Company Ltd (Nalco) is undergoing an expansion that will help reduce its cost of production and dampen the impact of aluminium price fluctuations on its profitability. The results started to show in the June quarter (Q1FY25). Ebitda jumped by a sharp 57% year-on-year, aided by coal from a captive block commissioned during the quarter, lower market price of coal, and higher realisation. Ebitda is earnings before interest, tax, depreciation and amortisation.
Still, Q1 Ebitda was below the Street’s expectations amid a nearly 40% drop in aggregate sales volume. The company’s production was disrupted because of maintenance and streamlining of its upcoming alumina facility. As such, the full-year production volume outlook remains unchanged.
The public sector undertaking plans to expand its alumina production capacity by one million tonnes per annum (mtpa), or about 25% of its current capacity. This is expected to be commissioned in the first half of FY26. Alumina is produced from bauxite ore and sold as an intermediate product or processed further to produce aluminium in an energy-intensive process.
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The alumina market faces significant scarcity, with July prices hovering at 22% of London Metal Exchange (LME) aluminium price, well above the normal range of 14-17%. “We remain positive on Nalco in view of the firm alumina price outlook, integrated business model, and attractive dividend yield," analysts at Antique Stock Broking said in a research report. The report projected that Nalco’s Ebitda margin would expand from 21.8% in FY24 to 30.7% in FY26.
Nalco also commissioned its captive coal block in Q1FY25. This, along with the lower market price of coal, helped reduce its largest cost item, power and fuel, by more than 25%. This coal block and another that is awaiting clearances will help the company meet nearly 60% of its coal requirement. This would give it a significant advantage because of the high energy-intensity of the production process. The company’s capex projection stands at about ₹2,000 crore annually for the next few years, similar to FY24 when it spent ₹2,130 crore. With a cash balance of ₹2,650 crore at the end of FY24 and adequate cash flow, funding should not be an issue.
Lithium ambition
To expand its presence beyond aluminium, Nalco entered into an agreement with its joint-venture partners in January to explore and develop lithium mines in Argentina at an initial cost of ₹200 crore. Considering the importance of lithium to the green-energy transition, the agreement could significantly enhance the company’s profits if it discovers mineable reserves in these blocks.
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“The stock’s valuation has re-rated since the news and it peaked at 9.6 times its 12-month forward consensus EV/Ebitda in May 2024 (a significant premium to the long-term average of 4.8x)," analysts from Axis Securities said in a report. “However, with the recent drop in LME aluminium prices, the stock is trading at 6.7x EV/Ebitda," they added. The enterprise value (EV) of a company is its market capitalisation plus net debt.
Despite the near-term pressure amid a decline in aluminium prices, the stock appears adequately priced for now, having appreciated 90% over the past year. Investors will closely watch the ramp up of coal blocks and the commissioning of alumina facilities from here. Nalco for its part needs to keep its project implementation schedule in check since many of its projects have faced significant delays.
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