Nalco’s CAPEX plans possibly to squash cash flows, refinery expansion project causing a flutter

The industry analysts said: “National Aluminium Company Ltd (Nalco) shareholders may have a thing or two to worry about in the coming years. The firm is going ahead with an expansion plan that will deplete cash flows and raise its debt levels. That may just be weighing on the stock.”

As on 7^th September’20, Nalco’s shares have slipped by about 2% in trade. Nalco refinery expansion project is causing a bit of a flutter.

Kotak Institutional Equities said: “Nalco is proceeding with its return dilutive alumina refinery expansion project of INR 6,000 crore. We estimate a negative free-cash-flow in FY2021-23 (estimates) as it would use all its surplus cash and NACL (Nalco) would require raising debt in FY2023 (E) to continue its expansion spends."

The strain on cash flows could also impact its high dividend yields in the coming years. Nalco’s dividend yield works out to about 4.2% on FY20 pay-outs.

Concurrently, the company did better than expected on the operations front in Q1, due to cost cuts and lower commodity expenses. Nevertheless, earnings before interest, tax, depreciation and amortization came in lower by about 39% year-on-year on a revenue decline of 34% y-o-y. Cost of coal and carbon were lower during the quarter and to an extent helped offset the fall in operating profits.

COVID-19 has axed down the production of alumina by 20% and aluminium by 11% on Y-o-Y, meanwhile in the next quarter production is expected to be better.

Positive information is that the market dynamics appear to be improving for the aluminium industry. Aluminium prices have picked-up about 20% in the international markets so far this financial year and could aid the operating profit growth of Nalco. Demand from China has been steady, while a weak US dollar could continue to support prices.

On the other hand, a worry for the aluminium market is the high inventory levels.

Kotak’s analysts said: “A surplus market and weak costs should cap further upside in aluminium prices. Alumina prices have rallied by 18% YTD FY2021 (E). The market remains well supplied despite the recent disruption at Alunorte, Brazil and we see limited upside.”

The analysts have raised expectations of earnings in FY21 on the back of the lower base and better realizations.

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