Nalco (NACL IN) Alumina volumes drive profits

INSTITUTIONAL EQUITY RESEARCH Nalco (NACL IN) Alumina volumes drive profits INDIA METALS Quarterly Update Top takeaways from Q4FY18 Net sales at Rs 28.6bn was 2% above estimates as higher alumina sales volumes helps Adjusted operating profit (adjusted to one time gratuity provisioning) at Rs 6.3bn was 6% above estimates driven by higher alumina profitability. Net profit at Rs 2.5bn was 33% below estimates. Adjusted to one time gratuity; it was 4% above estimates Declared final dividend of Rs 1 per share Key highlights: Strong quarter with one offs impacting reported profits. Adjusted to one offs; the company continues to beat estimates for the second quarter in a row. Nalco will continue to report strong profitability driven by higher prices. Higher realisations (both alumina as well as aluminium); largely due to supply disruptions globally; will see profits bump up in FY19 but will moderate in FY20 as the supply disruptions ease. We increase our profit assumptions to factor in higher realisations partly offset by higher costs (coal costs and oil related costs). Our FY19/20 operating profit assumptions stands revised up by 33%/20% and EPS estimates by 31%/18% for FY19/20. We retain our Buy rating on the stock with a target price to Rs 95. We reduce our target multiple from 6.5x to 6x to factor in lumpy FY19 profitability which may not sustain once supply disruptions ease. Other takeaways Alumina production/sales stood at 555/441kt, 3%/+6% vs. estimate Aluminium production/sales stood at 109/112kt, in line with estimate Employee costs at Rs 6.4bn, 37% above estimates. This includes ~Rs 1.4bn of one off gratuity provisions. Adjusted to this, it stood 7% above estimates Adjusting to above one offs, operating profit stood at Rs 6.3bn, 6% above estimates. Utkal D coal block is expected to commission by Q2FY20 while Utkal E will commence operations in FY23. We are yet to factor in any of the said benefits into our estimates. 1mn tonne brownfield alumina refinery expansion is expected to commission by April 2021. The company is setting up a wire rod plant with a capacity of 60000 tonnes at a total project cost of Rs 1.3bn. It is expected to commission by Sep 2019 All the above projects including commissioning of 2.7 lakh tonne caustic soda plant (in JV with GACL), will add Rs 9.4bn to net profits once fully operational. Outlook and valuation: Strong quarter adjusting to one offs. We see the profitability staying strong as the company reaps the benefits of higher commodity prices. We retain our Buy rating on the stock with a target price of Rs 95. 28 May 2018 BUY (Maintain) CMP RS 73/ TARGET RS 95 (+31%) COMPANY DATA O/S SHARES (MN) : 1933 MARKET CAP (RSBN) : 137 MARKET CAP (USDBN) : 2 52 WK HI/LO (RS) : 98 / 61 LIQUIDITY 3M (USDMN) : 13.1 PAR VALUE (RS) : 5 SHARE HOLDING PATTERN, % Mar 18 Dec 17 Sep 17 PROMOTERS : 60.2 60.2 65.4 FII / NRI : 6.4 7.1 6.6 FI / MF : 21.2 21.7 18.2 NON PRO : 1.4 1.6 1.0 PUBLIC & OTHERS : 10.8 9.4 8.9 Key Financials Rs mn FY18 FY19E FY20E Net Sales 96,183 106,263 104,160 EBIDTA 13,975 27,222 23,992 Net Profit 5,183 16,839 14,567 EPS, Rs 2.7 8.7 7.5 PER, x 27.1 8.4 9.7 EV/EBIDTA, x 8.1 4.1 4.8 P/BV, x 1.3 1.3 1.2 ROE, % 4.9 15.3 12.8 CHANGE IN ESTIMATES Revised Est. % Revision Rs mn FY19E FY20E FY19E FY20E Revenue 106,263 104,160 8% 5% EBITDA 27,222 23,992 33% 20% PAT 16,839 14,567 31% 18% EPS (Rs) 8.7 7.5 31% 18% Dhawal Doshi (+ 9122 6246 4128) ddoshi@phillipcapital.in Vipul Agrawal (+ 9122 6246 4127) vagrawal@phillipcapital.in (Rs mn) Q4FY18 Q4FY17 yoy growth % Q3FY18 qoq growth % vs. expectations % Comments Total Operating Income 28,632 24,233 18.2% 23,888 19.9% 2.2% Operating Expenditure 23,735 19,958 18.9% 20,451 16.1% 7.5% Operating profits 4,897 4,275 14.5% 3,437 42.5% 17.4% Adjusted OP stood 6% above estimates Other Income 573 620 7.5% 766 25.2% 16.9% Depreciation 1,268 1,086 16.7% 1,243 2.0% 0.9% Interest 6 10 43.4% 5 9.8% 9.8% Non recurring Gain/(Loss) 64 (30) 8,015 PBT 4,261 3,768 13.1% 10,969 61.2% 20.5% Tax 1,690 1,084 55.8% 3,752 55.0% 5.1% Net Profit 2,571 2,684 4.2% 7,218 64.4% 31.5% Page 1 PHILLIPCAPITAL INDIA RESEARCH

Financials Income Statement Y/E Mar, Rs mn FY17 FY18 FY19e FY20e Net sales 74,260 96,183 106,263 104,160 Growth, % 11 30 10 2 Other income 1,170 0 0 0 Total income 75,430 96,183 106,263 104,160 Raw material expenses 10,852 15,127 16,014 16,181 Employee expenses 15,374 22,612 19,761 20,749 Other Operating expenses 37,863 44,469 43,266 43,239 EBITDA (Core) 11,341 13,975 27,222 23,992 Growth, % 20.9 23.2 94.8 (11.9) Margin, % 15.3 14.5 25.6 23.0 Depreciation 4,804 4,804 5,012 5,098 EBIT 6,538 9,171 22,211 18,894 Growth, % 27.2 40.3 142.2 (14.9) Margin, % 8.8 9.5 20.9 18.1 Interest paid 27 20 0 0 Other Non Operating Income 4,083 2,997 2,922 2,849 Non recurring Items 402 8,241 0 0 Pre tax profit 10,192 20,388 25,132 21,742 Tax provided 2,962 6,964 8,294 7,175 Profit after tax 7,230 13,424 16,839 14,567 Net Profit 7,230 13,424 16,839 14,567 Growth, % 12.6 (32.1) 224.9 (13.5) Net Profit (adjusted) 7,632 5,183 16,839 14,567 Unadj. shares (m) 1,933 1,933 1,933 1,933 Wtdavg shares (m) 1,933 1,933 1,933 1,933 Balance Sheet Y/E Mar, Rs mn FY17 FY18 FY19e FY20e Cash & bank 22,872 27,690 30,302 25,267 Debtors 1,843 2,581 2,852 2,795 Inventory 11,559 11,941 13,126 13,304 Loans & advances 1,173 1,043 1,032 1,022 Other current assets 17,517 14,910 14,910 14,910 Total current assets 54,964 58,164 62,222 57,298 Investments 12,607 7,106 7,106 7,106 Gross fixed assets 167,109 171,350 174,350 177,350 Less: Depreciation 95,151 99,955 104,967 110,065 Add: Capital WIP 5,147 9,152 21,152 33,152 Net fixed assets 77,104 80,547 90,535 100,437 Total assets 144,675 145,817 159,863 164,841 Current liabilities 25,540 21,006 28,003 28,403 Provisions 4,452 8,120 8,323 8,531 Total current liabilities 29,992 29,126 36,326 36,933 Non current liabilities 12,626 11,643 13,151 14,456 Total liabilities 42,617 40,769 49,477 51,389 Paid up capital 9,665 9,665 9,665 9,665 Reserves & surplus 92,393 95,384 100,721 103,788 Shareholders equity 102,058 105,048 110,386 113,452 Total equity & liabilities 144,675 145,817 159,863 164,841 Cash Flow Y/E Mar, Rs mn FY17 FY18 FY19e FY20e Pre tax profit 10,192 20,388 25,132 21,742 Depreciation 4,804 4,804 5,012 5,098 Chg in working capital 8,683 751 5,755 497 Total tax paid 1,948 7,886 6,786 5,870 Other operating activities 2,139 2,677 0 0 Cash flow from operating activities 23,869 20,735 29,113 21,466 Capital expenditure 10,607 8,247 15,000 15,000 Cash flow from investing activities 14,443 2,745 15,000 15,000 Free cash flow 9,427 17,989 14,113 6,466 Dividend (incl. tax) 8,051 13,111 11,501 11,501 Cash flow from financing activities 35,889 13,172 11,501 11,501 Net chg in cash 26,463 4,817 2,612 5,035 Valuation Ratios FY17 FY18 FY19e FY20e Per Share data EPS (INR) 3.9 2.7 8.7 7.5 Growth, % 50.2 (32.1) 224.9 (13.5) Book NAV/share (INR) 52.8 54.3 57.1 58.7 FDEPS (INR) 3.9 2.7 8.7 7.5 CEPS (INR) 6.6 0.9 11.3 10.2 CFPS (INR) 9.1 7.8 13.6 9.6 DPS (INR) 3.50 5.70 5.00 5.00 Return ratios Return on assets (%) 4.7 9.3 11.0 9.0 Return on equity (%) 7.5 4.9 15.3 12.8 Return on capital employed (%) 5.5 11.0 13.1 10.9 Turnover ratios Asset turnover (x) 0.9 1.1 1.2 1.0 Sales/Total assets (x) 0.5 0.7 0.7 0.6 Sales/Net FA (x) 1.0 1.2 1.2 1.1 Working capital/sales (x) 0.1 0.1 0.0 0.0 Working capital days 32.2 35.9 13.5 12.7 Liquidity ratios Current ratio (x) 2.2 2.8 2.2 2.0 Quick ratio (x) 1.7 2.2 1.8 1.5 Interest cover (x) 243.0 470.3 Dividend cover (x) 1.1 0.5 1.7 1.5 Net debt/equity (%) (21.9) (25.9) (27.0) (21.9) Valuation PER (x) 18.4 27.1 8.4 9.7 Price/Book (x) 1.4 1.3 1.3 1.2 EV/Net sales (x) 1.4 1.2 1.0 1.1 EV/EBITDA (x) 9.4 8.1 4.1 4.8 EV/EBIT (x) 16.2 12.4 5.0 6.1 Source: Company, PhillipCapital India Research Estimates Page 2 PHILLIPCAPITAL INDIA RESEARCH

Stock Price, Price Target and Rating History 120 100 80 60 B (TP 100) B (TP B (TP 76) B 80) (TP 80) N (TP 85) B (TP 85) 40 B (TP 65) B (TP 41) B (TP B (TP 41) 44) B (TP 44) B (TP 53) B (TP 60) 20 0 M 15 J 15 A 15 S 15 N 15 D 15 F 16 M 16M 16 J 16 A 16 S 16 N 16 D 16 F 17 M 17M 17 J 17 A 17 S 17 N 17 D 17 F 18 M 18 Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL 15% > to < +15% Target price is less than +15% but more than 15% SELL <= 15% Target price is less than or equal to 15%. Page 3 PHILLIPCAPITAL INDIA RESEARCH

RESEARCH Automobiles Dhawal Doshi Nitesh Sharma, CFA Agro Chemicals Varun Vijayan Banking, NBFCs Manish Agarwalla Pradeep Agrawal, Sujal Kumar Consumer Preeyam Tolia, Vishal Gutka Cement Vaibhav Agarwal Engineering, Capital Goods Jonas Bhutta Vikram Rawat Economics Anjali Verma Raag Haria IT Services Vibhor Singhal Shyamal Dhruve Infrastructure Vibhor Singhal Logistics, Transportation & Midcap Vikram Suryavanshi Media Vishal Gutka Metals Dhawal Doshi Vipul Agrawal Midcaps Deepak Agarwal Akshay Mokashe MANAGEMENT Vineet Bhatnagar (Managing Director) Kinshuk Bharti Tiwari (Head Institutional Equity) Jignesh Shah (Head Equity Derivatives) Pharma & Specialty Chem Surya Patra Mehul Sheth, Rishita Raja Retail & Real Estate Vishal Gutka Dhaval Somaiya Strategy Neeraj Chadawar Telecom Technicals Subodh Gupta, CMT Production Manager Ganesh Deorukhkar Editor Roshan Sony Sr. Manager Equities Support Rosie Ferns SALES & DISTRIBUTION Kishor Binwal Ashvin Patil Bhavin Shah Ashka Gulati Archan Vyas Asia Sales Dhawal Shah Sales Trader Dilesh Doshi Suniil Pandit Execution Mayur Shah CORPORATE COMMUNICATIONS Zarine Damania REGIONAL MEMBER COMPANIES INDIA PhillipCapital (India) Private Limited www.phillipcapital.in SINGAPORE Phillip Securities Pte Ltd www.phillip.com.sg JAPAN Phillip Securities Japan, Ltd www.phillip.co.jp THAILAND Phillip Securities (Thailand) Public Co. Ltd. www.phillip.co.th UNITED STATES Phillip Futures Inc. MALAYSIA Phillip Capital Management Sdn Bhd www.poems.com.my INDONESIA PT Phillip Securities Indonesia www.phillip.co.id FRANCE King & Shaxson Capital Ltd. www.kingandshaxson.com AUSTRALIA PhillipCapital Australia www.phillipcapital.com.au HONG KONG Phillip Securities (HK) Ltd www.phillip.com.hk CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. www.phillip.com.cn UNITED KINGDOM King & Shaxson Ltd. www.kingandshaxson.com SRI LANKA Asha Phillip Securities Limited www.ashaphillip.net/home.htm Page 4 PHILLIPCAPITAL INDIA RESEARCH

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