Rising alumina prices, a shot in the arm for Nalco
Summary
- Nalco's stock surge, fuelled by a sharp rise in alumina prices, reflects its strategic advantage as an integrated producer. However, while the company's cost-saving measures bolster short-term earnings, volatile aluminium prices and muted volume growth may limit sustained upside.
Shares of National Aluminium Company Ltd (Nalco) hit a new 52-week high of ₹227.39 on the National Stock Exchange on Tuesday, driven by rising alumina prices amid a supply shortage.
The global aluminium market has been experiencing widespread disruption across the entire bauxite-alumina-aluminium supply chain. Alumina prices have surged 45% over the last six months due to production disruptions and raw material shortages, exacerbated by mining restrictions in China. Notably, Rio Tinto, a key global alumina supplier, has lowered its 2024 production guidance to 7.0-7.3 million tonnes, down from 7.6-7.9 million tonnes, citing force majeure. Aluminium prices have also climbed, gaining nearly 22% from August lows of $2,160 per tonne.
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These factors are likely to work in the favour of Nalco, giving its earnings outlook a boost. In fact, brokerage firm Kotak Institutional Equities has upgraded Nalco's stock outlook to ‘Add’ from ‘Sell’, projecting its Ebitda to increase by almost 90% in FY25 with the surge in alumina prices. Ebitda is earnings before interest, tax, depreciation and amortization.
Alumina accounted for about 43% of the company’s Ebitda in FY24, but its share is projected to reach 53% in FY25 with higher realization and lower cost of production. “We upgrade alumina price forecast by 11%/10%/7% for FY2025/26/27, factoring in the market tightness and expect only a gradual easing of the ongoing deficit", added the Kotak report dated 1 October.
Nalco is an integrated producer of aluminium with captive source of bauxite and coal mines meeting a part of its need. It commissioned a coal block with 2 million tonnes per annum capacity in Q1FY25 reducing its cost of production. After fulfilling its aluminium production needs, the company sells excess alumina on the open market.
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However, despite the sustained increase in alumina prices, aluminium prices have seen significant volatility reaching a low of less than $2,200 per tonne on the London Metal Exchange in early August from a high of about $2,700 in May, due to subdued global economic outlook. With improved sentiments in the US after the rate cuts and recent stimulus measures in China, it has again risen to $2,635 per tonne, up about 22% from the August lows.
The market is expected to remain tight with increasing imports by China as domestic capacity utilization has reached almost 95%. China’s domestic smelter capacity has been capped at 45.5 million tonnes per annum due to environmental concerns implying imports as the only recourse to meet the demand.
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Meanwhile, in this calendar year so far, the Nalco stock has risen 61%, the rally has picked pace with the stock up 25% in the last one month alone. On the valuations front, the stock is trading at FY25 estimated price-to-earnings of 16.3x, shows Bloomberg data.
The spurt in aluminium prices could lead to additional gains in the stock, yet the stock remains vulnerable to price fluctuations. Also, in the near term Nalco's earnings growth is likely to be driven by cost saving initiatives as seen in the June quarter, as volume growth is likely to be muted.