Sell National Aluminum Company - Elara Capital

National Aluminium (Nalco) reported its Q3FY12 numbers far below our as well as street estimates. The lower than anticipated performance was a result of lower volume sales, decline in the LMEs and higher wage costs. The revenues for the quarter increased 0.4% YoY but declined 11.4% QoQ on the back of decline in both alumina as well as aluminum sales volumes. Nalco has shut down some of its pot lines which resulted in lower volume sales during the quarter. The EBITDA for the quarter stood at INR453mn representing a decline of 87.8% YoY and 70.3% QoQ. The adjusted PAT for the quarter was lower by 80% YoY and 63.3% QoQ and stood at INR512mn.

Highlights for the quarter

- Alumina production declined 2.3% YoY to ~389,000 tonnes, while the aluminum production declined 15.8% YoY to ~93,500 tonnes.

- The alumina volume sales for the quarter stood at 163,000. The aluminum sales declined 21.6% YoY and 3.6% QoQ to ~98,000 tonnes.

Valuation and recommendation

Although, Nalco is likely to complete its pipeline of project expansions, we believe, the same will lack in terms of material volume growth in the aluminum segment. Although, it continues to have a very strong balance sheet, the ongoing capex program will weaken the same and erode the net cash position. At present, it is trading at richer valuations as compared to its peers. It is currently trading at 10.5x FY12E EV/EBITDA and 23.0x FY12E P/E. We have valued the stock on 5.5x FY13E EV/EBITDA and arrive at our target valuation of INR 50/share. We continue to be bearish on Nalco due to its lack of material volume growth in the visible future and recommend a Sell on the stock.