>National Aluminium (INDIABULLS)

National Aluminium Company Ltd - SELL

Falling LME prices threaten profitability
National Aluminium Company Limited (NALCO) reported a weak set of numbers in Q3’09, mainly on account of lower sales due to declining demand. Net sales fell 6.6% yoy to Rs.10.4 bn because of a 14.9% yoy decline in the aluminium sales volume to ~75,000 tonnes. EBITDA plunged 39.7% yoy mainly on account of higher input costs. We do not expect aluminium prices to bounce back in the upcoming quarters, given the rising inventory levels on the LME and the falling demand. Factoring in the Company’s weak performance and the downbeat aluminium outlook, we have downgraded our rating from Hold to Sell. We expect NALCO to underperform
in the near-to-medium term due to the following reasons.

Aluminium prices to remain under pressure: We believe that aluminium prices will be in the range of USD 1,400–1,600 per tonne in FY10. LME aluminium prices have declined ~60% since July 2008, and we do not foresee any price recovery in the near term as the automobile, infrastructure, and packaging industries (which drive more than two-thirds of the global aluminium demand) are witnessing a recession. In addition, inventory levels at the LME have reached 3 million tonnes, mainly on account of lower demand. Thus, amidst the weak global demand and rising inventory levels, aluminium prices on the LME are expected to remain subdued in FY10.

Margins to contract: FY08 We expect the Company’s operating cost to decline by 18–20% in FY10, primarily due to falling power & fuel costs. However, we believe that the expected lower realisations will overshadow the benefit resulting from reduced operating costs. Thus, we expect NALCO’s EBITDA margin to be ~32% in FY09 and ~25% in FY10, compared with 43.9% in.

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