Sell Nalco, target price Rs 29: Emkay Global

Emkay Global has given a sell rating to National Aluminium Company with a 12-month target price of Rs 29. The share price moved down by -1.76 per cent from its previous close of Rs 34.10. The stock’s last traded price is Rs 33.50.

Nalco has been operating at near capacity for the past several years, with expansion projects continuously delayed. The brokerage sees no volume growth for next 2-3 years at least. Any increase in aluminum production at CMP will add to further losses due to high fixed costs in the aluminum division. In the past, Nalco had discussed several business opportunities in India and abroad, but the brokerage believes that it will take at least 5- 6 years before anything fructifies, there could be a substantial cash outflow, dimming dividend prospects.

Investment Rationale

With power costs falling globally, the brokerage expects alumina and aluminum prices to remain muted in the near term, which will negatively impact Nalco’s profitability.

The brokerage has cut its target multiple on Nalco from 4.5 times to 4 times on account of (a) possibility of settlement of tax disputes in various govt schemes (b) non-disclosure of material impact of RPO liability in the results. The brokerage has cut its FY21/22E EBTDA by 44 per cent/2 per cent, driven by lower LME assumptions, which is offset by lower Re/$ assumptions.

With a bearish near-term outlook on alumina, the brokerage maintains a sell rating with a target price of Rs 29 based on 4 timesMar-22 EV/EBITDA.

The key risk is a spike in alumina prices if the second wave of Covid-19 impacts bauxite mining and results in shortage of alumina in the merchant market.


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.