Nalco to see better days with rising alumina prices

National Aluminium Company (Nalco), the world's second lowest cost producer of alumina, will benefit from the rising alumina price. Global alumina benchmark price has risen around 14% over the past month and 30% in three months. This should boost the company's December quarter results.

Alumina is used in the production of aluminium. The sharp rise in alumina price can be attributed to low inventories, especially in China. Restarting of aluminium smelters, which have been shut due to low demand, along with rising aluminium prices has increased demand for alumina.

According to commodity trackers, alumina price may rise by another 17-23% in 2017 as more Chinese aluminium smelters become operational. The deficit in alumina is expected to increase to 4.8 million tonnes (MT) in FY17 and over 6 MT in FY18 reflecting a possible supply shortage of 10%.

Nalco, which has alumina refining capacity of 2.3 MT, uses around 0.9 MT for its own aluminium production while the rest is sold to other aluminium producers in India and abroad. Its alumina refinery is the second lowest cost producer due to its proximity to high quality bauxite mines, a major raw material. In addition, weakening rupee against the dollar is expected to improve the company's export realisation.

In the June quarter, the company's alumina business reported operating profit (EBIT) of INR 215 crore while the aluminium business posted operating loss of INR 106 crore. With rising prices of both the commodities, the coming quarters are expected to be better.

Analysts expect INR 1,500 crore in operating profit before depreciation (EBITDA) for FY17 and around INR 1,800 crore for FY18. The company's enterprise value is six times EBIDTA compared with the 10-year average of 8.2. Nalco's cash equivalents are 20% of the market capitalisation. It is a regular dividend payer, which gives additional comfort in the volatile markets. At the Wednesday's closing price of INR 56.9, the stock's dividend yield was around four.

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