Buy Nalco, target price Rs 40: Motilal Oswal

Motilal Oswal has given a buy rating to National Aluminium Company with a target price of Rs 40. The share price moved down by -4.48 per cent from its previous close of Rs 33.50. The stock’s last traded price is Rs 32.

According to the brokerage, Nalco reported improved 4QFY20 results, as expected, driven by lower cost of production. Realization, however, remained weak due to lower LME. The brokerage has raised its FY21 EBITDA estimate to factor in lower input costs in FY21.

Investment Rationale

Alumina/aluminum LME prices have recovered around 10 per cent from the lows witnessed this year. With estimated gradual recovery in aluminum demand, the brokerage expects prices to rise further. It has factored in aluminum prices of $1,575/t in FY21 and $1,700/t in FY22. With integrated operations, Nalco is best placed to benefit from recovery in prices.

Improved coal availability, lower input costs, and currency depreciation are likely to offset lower alumina and aluminum prices in FY21. The brokerage maintains its positive stance on Nalco considering its integrated business model, high cash levels, and attractive dividend yield. The brokerage values the stock at 5 times FY22E EV/EBITDA to arrive at a target price of Rs 40.

Source: Motilal Oswal

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 1935.86 crore, down -7.30 per cent from last quarter sales of Rs 2088.35 crore and down -30.02 per cent from last year's same quarter sales of Rs 2766.20 crore. The company reported net profit after tax of Rs 102.76 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 51.49 per cent stake in the company as of March 31, 2020, while FIIs held 11.3 per cent, DIIs 14.21 per cent and public & others 23 per cent.