Coal concerns mar Nalco’s prospects

Nalco hopes to increase alumina output by 20 per cent in FY14 and export a larger quantity of alumina and aluminium in 2013 but coal supplies may cap gains

The share price of National Aluminium Company or Nalco has risen almost 40 per cent from its 10- year low of Rs 24.10, seen on August 6, to Rs 33.7, on the back of a rise in the global aluminium price, which is up only marginally, and a weak rupee that props up realisations. As compared to the average price of $ 1,767 a tonne in July, the aluminium price on the London metal Exchange ( LME) was up at $ 1,814 in August. Currently, the same is around $ 1,780. Since end-July, the rupee was also down more than 12 per cent versus the dollar.

Operationally, Nalco is targeting to increase alumina output by 20 per cent in FY14. It also expects to export a larger quantity of alumina and aluminium this year. However, the overall gains from these for Nalco would get capped, given the continuing issues it faces with respect to coal supplies, which are hurting its production and profitability. Aluminium is a power- intensive business and coal is a key ingredient to produce power.

The varying linkage of coal availability had led to volatility in Nalco’s profitability in the past too. The company, which had been forced to shut 120 of its 930 pots (at its smelter) due to non- availability of coal during the September 2011 quarter, was again forced to shut 198 pots out of 960 in the June 2013 quarter. For the June quarter, aluminium production at 85,000 tonnes was down 17.5 per cent year-on-year.

Due to lower supplies from Coal India’s Bharatpur mine, Nalco had to use e-auction route for coal for around five per cent of its requirements and imported coal to the tune of six per cent in the June 2013 quarter, which saw power and fuel costs surge 62.5 per cent sequentially. With linkage coal supplies being hit and looking at Coal India’s commitment to the power sector, the situation on coal linkage may not improve soon, believe analysts. Most of them don’t see the pots restarting soon and attribute it to the lower management expectation of aluminium output during the FY14 at 300,000-320,000 tonnes against 400,000 tonnes in FY13. Analysts at Kotak Institutional Equities, in a report, said the shutdown will increase overall cost pressure due to apportioning of fixed costs on lower volumes, also visible in the June quarter. After the June quarter results in mid- August, analyst Giriraj Daga at Nirmal Bang, had revised its Ebitda estimates downwards by 20 per cent and 25 per cent for FY14 and FY15, respectively, due to a rise in cost assumptions.

The company’s Utkal coal block, expected to provide respite, is also expected to start production only in late 2014. In this backdrop, analysts don’t see further gains for Nalco’s stock, whose consensus target price is Rs 32.

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