>NATIONAL ALUMINIUM COMPANY (RELIANCE MONEY)

Catastrophic performance

National Aluminium Co. Ltd. (Nalco) has delivered its worst ever performance in last 16 quarters - courtesy low LME Aluminium prices which are currently trading at slightly above cost of production ($1500 per tonne). Nalco posted Net sales revenue of Rs. 10.9 bn (down by 23% (YoY)), an EBIDTA of Rs. 0.58 bn (YoY decline of 90%) and a PAT of Rs 0.83 bn (drop by 80%). The other income of Rs 1.45 bn has saved the day for the company. The EBIDTA margins have been cut
by 3498 bps (YoY) to 5.4%.

Aluminium prices to be under pressure:
LME Aluminium prices had been trading in the band of $1400 - 1500 per tonne before sharp jump by about $200 per tonne on the news of supply shocks from Russia and the LME Aluminium inventory has risen to a whooping 4.27 mn tonne which is approx. 10% of the last year's total global Aluminium consumption. Plummeting prices are the result of collapse of demand for Primary Aluminium. Demand has been crushed by a major drop in the end market demand globally and greatly exacerbated by inventory destocking through out the supply chain. Currently, the Aluminium metal stock at LME is at the level of about 6.5 weeks' consumption. It is expected to grow to level of about 8.4 weeks' consumption by the end of CY09. The increasing inventory at LME is expected to keep pressure on the prices. Secondly, the supply demand mismatch in the Aluminium market
is expected to be extant till FY11E. We estimate around 6 mmT of stock inventory at LME by CY11E though the growth in inventory may have flattened by then.

EBIDTA margins are expected to be squeezed
Cap on Aluminium prices coupled with rise in the input cost due to a) expected rise in CPC and CTP cost and b) increase in cost of Bauxite ( Due to labour problem post Naxal attacks in Bauxite mines), the EBIDTA margins of the company are expected to drop sharply. We envisage an approx. 1100 bps of cut in EBIDTA margins of Nalco in FY10E over FY09. Though we expect a dismal performance of the company in FY10E, it is expected to improve in FY11E due to partial addition of the capacities from 3rd phase of expansion. We have assumed an average LME Aluminium price of $1825/tonne and $1950/tonne for FY10E and FY11E respectively and exchange rate of Rs 47/$ and Rs 46/$ respectively.

Valuation:
At CMP, the stock is quoting at an EV/EBIDTA of 10.2x for FY11E earnings. Due to the huge LME inventory, we expect the LME Aluminium prices to be range bound. We perceive the stock to be currently quoting at stretched valuations and recommend a Sell with a price target of Rs 287 at which it will quote at an EV/EBIDTA of 8x for FY11E earnings. The target price also quotes at the P/E of 13.8x FY11E earnings which is roughly near the mean of the P/E band. We would like
to issue a rider that being a PSU, the company is likely to feature in the disinvestment list as GoI controls 87% of the stock. Any news on disinvestment will take the stock to further highs though it may not be backed by fundamentals.

To see full report: NALCO