Buy This Navratna Stock For A Target Price of Rs. 150 Says Axis Securities

Investment rationale for NALCO as per the brokerage

Axis Securities has noted "With higher Aluminium prices, we forecast revenue/EBITDA/PAT CAGR of 23%/56%/50% over FY21-23E, and YoY growth of 1.4%/1.8%/1.8% on FY22E/23E. With higher profitability, the company would be able to fund its growth capex from the internal earnings, with positive FCF post the growth capex, the company could sustain payout ratio of 50% translating into an attractive dividend yield of 9% and 7% in FY22E/23E. Nalco is expanding its Alumina refinery capacity by 1mtpa, the project is expected to start by Q3FY24. The company has been allotted coal blocks - Utkal D and E of 2 mtpa each. The coal block could reduce the power cost by replacing the e-auction coal going forward, however due to delays, the coal mining is expected to start only from FY24 in a phased manner. The Caustic soda JV is expected to start from FY23. We don't model incremental Alumina volumes from the Alumina refinery expansion in FY24."

According to the brokerage "In 2022, the Aluminium market is likely to be in a deficit of ~1.4Mnt a second consecutive time (2021 deficit of ~0.9Mnt). China's decarbonisation policy is impacting the Chinese supply and would drive the deficits in coming years. China is expected to remain in primary aluminium structural deficit (~1-2 Mtpa) in 2022. In Europe, the higher power prices led to curtailment of smelting capacity (~15% of total European capacity). The Russia Ukraine crisis and possible supply sanctions on Rusal (Rusal's 40% revenue is from European shipments) has led the LME spot to rise to a historical high level of $3,300/tonne. With supply disruptions and strong underlying demand the LME and SHFE stocks are on a declining trend. The aluminium market will remain sensitive to supply shocks as a result of historically low stocks of the metal."

Buy for a target price of Rs. 150

As per the brokerage "Average 12MF consensus EV/EBITDA over the last 10 years for Aluminium companies ranged from 5x to 10x, with Vedanta at 5x, Alcoa 5.4x, Rusal 9.6x, Norsk Hydro 6.1x and Hindalco at 6.4x. Nalco is trading at 4.6x on our FY23 EBITDA estimate. Nalco is the only equity pure play on Aluminium and Alumina prices. Company has high exposure to LME Aluminium and Alumina as it sells Aluminium unwrought products without much value addition, downstream processing. With LME Aluminium at 13 year high, and Alumina prices ticking up towards $400/tonne, Nalco is best placed to ride the tailwinds and it has correctly started optimising its Aluminium production."

Axis Securities has added "We expect Aluminium prices to remain high in FY23, as metal is expected to remain in a deficit in FY23 also. China's focus to cut carbon emissions will limit supply from the region. In RoW, considering the long term environmental impact, renewable power based brownfield or greenfield smelters will be difficult to come online quickly, while demand will remain strong. We value the stock at 5.5x FY24 EBITDA estimate and 0.5x book value of CWIP to arrive at our target price of Rs 150, an upside of 25% from CMP. We initiate the coverage of Nalco with BUY rating."

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.