12 November 2017
Q2FY18 Results Update | Sector: Metals
Nalco
Neutral
BSE SENSEX
33,315
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm
Free float (%)
S&P CNX
10,322
NACL IN
1,933
168.2 / 2.6
98 / 48
4/21/43
286.2
34.6
CMP: INR87
Maintain Neutral
TP: INR87(0%)
Inline; Aluminum ramping-up as expected
NALCO’s 2QFY18 EBITDA, as expected, increased by healthy 47% QoQ/95% YoY
to INR3.3b driven by higher realization and volumes. Though there was an
impressive beat on alumina volumes, it was offset by lower than expected
realization and cost inflation. Exceptional income of INR1.6b included DMF
reversal of INR1.9b, net of entry tax provision of INR0.3b. Adj. PAT increased
73% QoQ / 84% YoY to INR2.2b, ahead of est. of INR1.6b on higher other income
and lower tax rate (at ~27% vs. est. 33%).
n
Alumina production was down just 3% QoQ to 509kt (est. 444), despite
being a seasonally weak quarter. Sales increased 47% QoQ to 380kt, aided
by de-stocking. Realization increased 6% QoQ to USD334/t. Derived opt. cost
(incl. dep.) per ton increased marginally QoQ, as operating leverage gains
were offset by higher input prices.
n
Aluminum production increased 5% QoQ (13% YoY) to 105kt (est. 109kt).
Sales increased 28% QoQ to 113kt, aided by de-stocking. All-in aluminum
realization was flat QoQ at USD2,250/t as premium was lower due to mix.
Derived opt. cost (incl. dep.) per ton increased USD40/t QoQ due to increase
in power and other raw material cost. The increase in power cost was due to
domestic coal shortage and should normalize soon.
Cost pressure eroding captive cost advantage; Neutral
NALCO’s smelter ramp-up is tracking expectations. We expect aluminum
volumes to grow at ~6% CAGR to 460kt (full utilization) over FY17-20E. The
outlook on aluminum and alumina prices is also improving on supply measures
in China. NALCO’s integrated operating structure (captive alumina and linkage
coal) is an advantage. But operating costs are also rising on increase in wages
and electricity duty on captive generation. PAT est. are upgraded by ~4% for
FY18 for the 2Q beat. We value it at 6.5x FY19E EV/EBITDA at TP of INR87/sh.
Maintain Neutral.
FY17
FY18
2Q
3Q
4Q
1Q
2Q
3QE
4QE
18,461 19,881 25,497 18,027 24,548 24,647 24,231
1.7
21.6
36.0
16.4
33.0
24.0
-5.0
16,738 17,029 21,222 15,752 21,193 19,894 19,707
1,723 2,852 4,275 2,275 3,355 4,753 4,525
-49.2 109.2
79.1
16.9
94.7
66.7
5.8
9.3
14.3
16.8
12.6
13.7
19.3
18.7
6
6
10
4
4
0
0
1,353 1,177 1,086 1,170 1,123 1,157 1,152
1,369
759
620
859
810
647
704
1,733 2,428 3,798 1,960 3,037 4,243 4,076
0
-371
-30
0
162
0
0
1,733 2,057 3,768 1,960 3,199 4,243 4,076
521
618 1,084
670
853 1,385 1,330
30.1
30.0
28.8
34.2
26.7
32.6
32.6
1,212 1,439 2,684 1,289 2,346 2,858 2,746
1,212 1,699 2,705 1,289 2,227 2,858 2,746
FY17
79,329
16.4
68,533
10,796
15.1
13.6
17
4,804
4,083
10,058
10,058
2,962
29.4
7,097
7,097
FY18E
91,453
15.3
76,546
14,908
38.1
16.3
4,602
3,019
13,324
13,324
4,238
31.8
9,086
9,086
FY18 vs Est
2QE
(%)
20,983
17
14
17,767
19
3,216
4
87
15.3
0
1,196
-6
590
37
2,609
16
0
2,609
23
852
0
33
1,758
33
1,758
27
Financials & Valuations (INR b)
Y/E Mar
2017 2018E
Net Sales
75.4
91.5
EBITDA
10.8
14.9
PAT
7.2
9.0
EPS (INR)
3.7
4.7
Gr. (%)
37.9
25.5
BV/Sh (INR)
52.8
55.3
RoE (%)
7.2
8.6
RoCE (%)
7.9
11.3
P/E (x)
23.4
18.6
P/BV (x)
1.6
1.6
2019E
93.2
18.4
11.1
5.8
23.3
59.0
10.1
13.4
15.1
1.5
Estimate change
TP change
Rating change
Quarterly Performance (Consolidated)
Y/E March
Net Sales
Change (YoY %)
Total Expenditure
EBITDA
Change (YoY %)
As % of Net Sales
Interest
Depreciation
Other Income
PBT (before EO Item)
Extra-ordinary Income
PBT (after EO Item)
Total Tax
% Tax
Reported PAT
Adjusted PAT
1Q
15,490
3.9
13,544
1,946
-13.0
12.6
5
1,188
1,336
2,089
0
2,089
739
35.4
1,350
1,350
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Sanjay Jain – Research Analyst
(SanjayJain@MotilalOswal.com); +91 22 6129 1523
Dhruv Muchhal – Research Analyst
(Dhruv.Muchhal@MotilalOswal.com); +91 22 6129 1549

Nalco
Exhibit 1: Operating metrics
Y/E March
Alumina Production ('000 tons)
Aluminium Prod. ('000 tons)
Aluminium Sales ('000 tons)
Alumina Sales ('000 tons)
Avg LME Aluminium (USD/ton)
NSR premiums (USD/ton)
Alumina NSR (USD/ton)
1Q
524
94
82
291
1,570
290
257
FY17
2Q
3Q
444
566
94
99
99
99
290
311
1,619 1,710
132
196
266
277
4Q
573
101
109
403
1,851
275
323
1Q
526
101
89
259
1,910
323
314
FY18
2Q
3QE
509
566
105
112
113
112
380
353
2,009 2,000
241
223
334
368
FY17
4QE
566
112
112
353
2,000
223
350
2,107
388
389
1,295
1,687
223
260
FY18E
FY19E
FY20E
2,167
2,102
5,254
430
449
460
426
449
460
1,345
1,250
1,228
1,980
2,000
2,000
253
223
223
342
350
350
Source: MOSL, Company
Exhibit 2: Alumina and aluminum production volumes – kt
Alumina
100 98
85
75
78
78
79
82
83
83
86
Aluminium
94
96
96
94
94
99 101 101
105
397 532 482 479 465 500 477 487 460 427 388 490 517 558 524 444 566 573 526 509
Source: MOSL, Company
Exhibit 3: Alumina and aluminum sales volumes – kt
Alumina
102 98
85
85
78
75 78 81 77 81 82
Aluminium
104
94 97
82
99 99
109
89
113
220 320 283 374 313 373 315 341 286 283 220 315 285 375 291 290 311 403 259 380
Source: MOSL, Company
Exhibit 4: Alumina CoP (incl. depreciation) – USD/t
237
241
225
238
238
212
205
221
218
226
251
254
191
191
Source: MOSL, Company
12 November 2017
2

Nalco
Exhibit 5: Aluminum CoP (incl. depreciation) – USD/t
Aluminum CoP incl. depreciation (USD/t)
Source: MOSL, Company
Exhibit 6: Target price calculation
EBITDA
EV/EBITDA (x)
Target EV
add: CWIP
add: cash surplus
Equity Value
Implied Price
FY15
17,060
6.5
110,891
5,497
55,790
FY16
9,380
6.5
60,973
6,614
58,106
FY17
10,796
6.5
70,176
5,660
35,479
111,315
FY18E
14,908
6.5
96,900
5,660
36,744
139,304
72
FY19E
18,374
6.5
119,431
5,660
42,410
167,502
87
FY19E
18,750
6.5
121,877
5,660
48,377
175,914
91
Source: MOSL, Company
12 November 2017
3

Nalco
Financials and Valuations
Income Statement
Y/E March
Net Sales
Change (%)
Total Expenses
EBITDA
% of Net Sales
Depn. & Amortization
EBIT
Net Interest
Other income
PBT before EO
EO income
PBT after EO
Tax
Rate (%)
Reported PAT
Adjusted PAT
Change (%)
2013
69,165
4.6
60,096
9,069
13.1
5,054
4,014
75
5,111
9,050
0
9,050
3,122
34.5
5,928
5,928
-31.5
2014
67,809
-2.0
58,466
9,342
13.8
5,247
4,095
0
5,577
9,672
-494
9,178
2,755
30.0
6,424
6,769
14.2
2015
73,828
8.9
56,768
17,060
23.1
4,137
12,924
0
6,726
19,650
1,484
21,134
7,916
37.5
13,219
12,290
81.6
2016
68,170
58,575
9,595
14.1
4,261
5,333
33
6,052
11,353
-535
10,818
4,015
37.1
6,803
7,139
2.6
2017
75,430
10.7
64,634
10,797
14.3
4,804
5,993
27
4,075
10,041
402
10,442
2,962
28.4
7,480
7,193
0.8
2018E
91,453
21.2
76,546
14,908
16.3
4,602
10,305
9
3,019
13,315
-162
13,153
4,238
32.2
8,915
9,025
25.5
2019E
93,240
2.0
74,866
18,374
19.7
4,662
13,712
0
2,814
16,526
0
16,526
5,394
32.6
11,132
11,132
23.3
(INR m)
2020E
94,387
1.2
75,637
18,750
19.9
4,658
14,092
0
2,814
16,906
0
16,906
5,518
32.6
11,388
11,388
2.3
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Total Loans
Deferred Tax Liability
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Investments
Curr. Assets
Inventories
Account Receivables
Cash and Bank Balance
Others
Curr. Liability & Prov.
Account Payables
Provisions & Others
Net Curr. Assets
Appl. of Funds
2013
12,886
106,438
119,325
0
9,031
128,356
141,750
75,461
66,289
10,019
14,901
72,061
13,806
1,430
35,044
21,781
34,914
31,201
3,713
37,147
128,356
2014
12,886
108,338
121,225
0
9,101
130,326
148,581
80,662
67,919
7,687
12,450
77,428
11,737
2,436
40,483
22,773
35,159
31,505
3,655
42,269
130,326
2015
12,886
115,087
127,973
0
11,053
139,026
152,847
86,393
66,454
5,497
10
89,815
11,656
1,208
55,780
21,171
22,751
18,461
4,290
67,064
139,026
2016
12,886
119,063
131,949
0
11,641
143,590
70,210
4,253
65,957
6,877
9,445
84,825
10,550
2,352
51,692
20,231
23,513
6,559
16,955
61,311
143,590
2017
9,665
92,387
102,052
511
12,456
115,018
80,489
9,044
71,444
5,660
389
67,517
11,559
1,843
35,084
19,031
29,992
8,641
21,351
37,525
115,018
2018E
9,665
97,310
106,975
511
12,456
119,942
86,489
13,647
72,842
5,660
389
72,424
14,031
3,007
36,355
19,031
31,373
10,022
21,351
41,051
119,942
2019E
9,665
104,451
114,116
511
12,456
127,082
92,489
18,309
74,179
5,660
389
78,423
14,305
3,065
42,021
19,031
31,569
10,218
21,351
46,854
127,082
(INR m)
2020E
9,665
111,848
121,512
511
12,456
134,479
98,489
22,968
75,521
5,660
389
84,604
14,481
3,103
47,988
19,031
31,695
10,344
21,351
52,909
134,479
12 November 2017
4

Nalco
Financials and Valuations
Cashflow Statement
Y/E March
Pre-tax profit
Depreciation
(Inc)/Dec in Wkg. Cap.
Tax paid
Non-op.
CF from Op. Activity
(Inc)/Dec in FA + CWIP
Free Cash Flow
(Pur)/Sale of Investments
Interest & div
CF from Inv. Activity
Equity raised/(repaid)
Int. Paid
Debt raised/(repaid)
Dividend (incl. tax)
Other financing activities
CF from Fin. Activity
(Inc)/Dec in Cash
Add: opening Balance
Closing Balance
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
Return Ratios (%)
EBITDA Margins (%)
Net Profit Margins (%)
RoE
RoCE (pre-tax)
RoIC (pre-tax)
Working Capital Ratios
Debtor (Days)
Inventory (Days)
Payable (Days)
Working Capital Turnover
Leverage Ratio (x)
Current Ratio
2013
9,050
5,054
-726
-4,351
-266
8,762
-6,489
2,272
-7,358
731
-13,116
-75
0
-2,211
-2,285
-6,640
41,684
35,044
2013
2.3
4.3
46.3
1.3
63.6
37.8
20.4
1.9
2.5
19.2
1.4
13.1
8.6
5.0
7.2
5.8
8
73
165
3
2.1
2014
9,178
5,247
3,379
-3,596
-4,395
9,813
-6,187
3,627
2,450
4,517
781
0
0
-5,155
-5,155
5,439
35,044
40,483
2014
2.6
4.5
47.0
1.5
70.4
33.1
19.2
1.8
2.5
18.3
1.7
13.8
10.0
5.6
7.5
5.9
13
63
170
3
2.2
2015
21,134
4,137
-9,925
-4,915
-5,227
5,205
-3,031
2,173
12,440
5,749
15,157
0
0
-5,065
-5,065
15,297
40,483
55,780
2015
4.8
6.7
49.7
1.5
34.2
18.2
12.9
1.8
2.3
9.9
1.7
23.1
16.6
9.9
14.6
17.5
6
58
91
15
3.9
2016
11,887
4,261
1,021
-3,598
-4,763
8,808
-5,986
2,822
-8,555
4,769
-9,772
0
-12
0
-5,428
-5,440
-6,404
58,095
51,692
2016
3.7
5.7
68.3
2.0
60.5
23.6
15.2
1.3
1.6
11.2
2.3
14.1
10.5
6.2
8.0
7.1
13
56
35
14
3.6
2017
9,639
4,804
4,931
-2,184
-2,830
14,359
-7,781
6,578
10,178
2,795
5,191
-28,407
-4
511
-8,259
-36,159
-16,608
51,692
35,084
2017
3.7
6.4
52.8
2.8
60.5
23.4
13.7
1.6
1.8
12.3
3.2
14.3
9.5
7.2
7.9
8.0
9
56
42
3
2.3
2018E
13,153
4,602
-2,254
-4,238
9
11,272
-6,000
5,272
0
-6,000
0
-9
0
-3,991
-4,000
1,271
35,084
36,355
2018E
4.7
7.0
55.3
1.8
44.7
18.6
12.4
1.6
1.4
8.8
2.0
16.3
9.9
8.6
11.3
13.6
12
56
40
5
2.3
2019E
16,526
4,662
-137
-5,394
0
15,657
-6,000
9,657
0
-6,000
0
0
0
-3,991
-3,991
5,666
36,355
42,021
2019E
5.8
8.2
59.0
1.8
36.5
15.1
10.6
1.5
1.4
6.9
2.0
19.7
11.9
10.1
13.4
17.5
12
56
40
5
2.5
(INR m)
2020E
16,906
4,658
-88
-5,518
0
15,959
-6,000
9,959
0
-6,000
0
0
0
-3,991
-3,991
5,967
42,021
47,988
2020E
5.9
8.3
62.9
1.8
35.6
14.8
10.5
1.4
1.3
6.4
2.0
19.9
12.1
9.7
12.9
17.7
12
56
40
5
2.7
12 November 2017
5

Disclosures:
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
Motilal Oswal Securities Ltd. (MOSL) is a SEBI Registered Research Analyst having registration no. INH000000412. MOSL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock
broking services, Investment Advisory Services, Depository participant services & distribution of various financial products. MOSL is a subsidiary company of Motilal Oswal Financial Service Ltd. (MOFSL). MOFSL is a listed
public company, the details in respect of which are available on
www.motilaloswal.com.
MOSL is registered with the Securities & Exchange Board of India (SEBI) and is a registered Trading Member with National Stock
Exchange of India Ltd. (NSE) and Bombay Stock Exchange Limited (BSE), Metropolitan Stock Exchange Of India Ltd. (MSE) for its stock broking activities & is Depository participant with Central Depository Services Limited
(CDSL) & National Securities Depository Limited (NSDL) and is member of Association of Mutual Funds of India (AMFI) for distribution of financial products. Details of associate entities of Motilal Oswal Securities Limited are
available on the website at
http://onlinereports.motilaloswal.com/Dormant/documents/Associate%20Details.pdf
Pending Regulatory Enquiries against Motilal Oswal Securities Limited by SEBI:
SEBI pursuant to a complaint from client Shri C.R. Mohanraj alleging unauthorized trading, issued a letter dated 29th April 2014 to MOSL notifying appointment of an Adjudicating Officer as per SEBI regulations to hold
inquiry and adjudge violation of SEBI Regulations; MOSL requested SEBI to provide all documents, records, investigation report relied upon by SEBI which were referred in Show Cause Notice and also sought personal
hearing. The matter is currently pending.
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Nalco
Disclosure of Interest Statement
Analyst ownership of the stock
Nalco
No
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views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time
without any prior approval. MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities
mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities
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Registration details of group entities.: MOSL: NSE (Cash): INB231041238; NSE (F&O): INF231041238; NSE (CD): INE231041238; BSE (Cash): INB011041257; BSE(F&O): INF011041257; BSE(CD); MSE(Cash): INB261041231;
MSE(F&O): INF261041231; MSE(CD): INE261041231; CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser: INA000007100. Motilal Oswal Asset
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