MOSL: NALCO (Buy)-Another strong quarter-smelter now at full capacity; Valuations attractive

NALCO: Another strong quarter; smelter now at full capacity; Valuations attractive; Maintain Buy

(NACL IN, Mkt Cap USD1.8b, CMP INR70, TP INR90, 30% Upside, Buy)

2QFY19 EBITDA declined 16% QoQ (+140% YoY) to INR8.5b (in-line), led by lower LME. Adj. PAT was down 19% QoQ (+140% YoY) at INR5.1b (our estimate: INR5.4b). Effective tax rate stood at 38%, higher than our estimate of 33% and 34% in 1Q.

• Alumina: Production was down 18% QoQ at 477kt due to seasonal factors. Sales, however, increased ~1% QoQ to 324kt, led by destocking. Alumina realization increased 2% QoQ to USD570/t (our estimate: USD550/t). Calculated cost of production (CoP) increased QoQ.
• Aluminum: Production increased 4% QoQ (8% YoY) to 114kt, which is now near full capacity. Sales increased ~10% QoQ to 115kt. Aluminum realization declined by USD357 QoQ to USD2,162/t, as against a decline in LME of ~USD200/t. Product premiums were lower. CoP was lower QoQ, aided by operating leverage benefit and currency depreciation.

Alumina prices will drive earnings; valuations attractive; Maintain Buy

• While alumina prices have come off from recent highs, the market is expected to remain tight, given the partial shutdown at Hydro’s alumina facilities and rising aluminum production. NACL is a key beneficiary of higher alumina prices as it is net long and has the advantage of low-cost captive bauxite.