2QFY2012 Result Update | Base Metals

November 12, 2011

National Aluminium
Performance Highlights

NEUTRAL
CMP Target Price `60 yoy % 8.9 (56.1) (37.8) 1QFY12 1,733 530 377 qoq % (8.6) (71.2) (63.0)

Particulars (` cr) Net sales EBITDA EBITDA margin (%) Net profit
Source: Company, Angel Research

2QFY12 1,584 153 9.6 139

2QFY11 1,455 348 224

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

23.9 (1,427)bp

30.6 (2,094)bp

Base Metals 15,438 0.6 120/57 59435 5 17,193 5,169 NALU.BO NACL@IN

National Aluminiums (Nalco) 2QFY2012 profitability was significantly below our expectations on account of higher-than-expected raw-material and power and fuel costs. We have a Neutral view on the stock. Higher realization leads to net sales growth: For 2QFY2012, Nalcos net sales grew by 8.9% yoy to `1,584cr mainly due to increased realization, despite lower volumes. Realization of alumina and aluminium grew by 29.4% and 23.1% yoy to US$400 and US$2,599, respectively. However, the company lost production of atleast 6,000 tonnes of aluminium metal on account of coal supply disruptions by Mahanadi Coalfields. Lower domestic coal supplies hit margins: Raw-material cost as a percentage of net sales stood at 18.7% in 2QFY2012 compared to 15.5% in 2QFY2011. Further, power and fuel cost as a percentage of net sales stood at 40.3% in 2QFY2012 compared to 34.1% in 2QFY2011. The company had to import coal on account of lower supplies from Mahanadi Coalfields, which resulted in higher power costs. Hence, EBITDA decreased by 56.1% yoy to `153cr and EBITDA margin contracted by massive 1,427bp yoy to 9.6%. Other income grew by 54.7% yoy to `132cr and tax rate stood at 16.4% in 2QFY2012 compared to 33.7% in 2QFY2011. Consequently, net profit decreased by 37.8% yoy to `139cr (significantly below our estimate of `268cr). Outlook and valuation: Although Nalco enjoys high levels of backward integration, the cost of production remains very high for Nalco. Further, there is lack of clarity over Nalcos volume growth. At the CMP, Nalco is trading at valuations of 7.4x FY2012E and 4.5x FY2013E EV/EBITDA, higher than its peers. Hence, we recommend Neutral on the stock. Key financials
(` cr) Net sales % change Adj. PAT % change EPS (`) OPM (%) PE (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 87.2 5.2 4.3 3.4

Abs. (%) Sensex Nalco

3m

1yr

3yr 74.7 34.3

0.8 (16.5) (9.5) (40.9)

FY10 5,055 (0.8) 814 (35.3) 3.2 21.8 19.0 1.5 8.1 7.3 2.2 10.2

FY11 5,959 17.9 1,069 31.3 4.1 26.6 14.4 1.4 9.9 10.1 1.7 6.5

FY12E 6,853 15.0 995 (7.0) 3.9 19.0 15.5 1.3 8.6 6.5 1.4 7.4

FY13E 8,954 30.6 1,213 21.9 4.7 21.7 12.7 1.2 9.9 9.5 1.0 4.5

Bhavesh Chauhan
Tel: 022- 39357600 Ext: 6821 bhaveshu.chauhan@angelbroking.com

Please refer to important disclosures at the end of this report

National Aluminium | 2QFY2012 Result Update

Exhibit 1: 2QFY2012 performance

(` cr) Net Sales Raw Material % of Net sales Power and Fuel % of Net sales Staff Cost % of Net sales Other Expenses % of Net sales Total Expenditure % of Net sales Operating Income EBIDTA % of Net sales Interest Depreciation Other Income Exceptional Items Profit before Tax % of Net sales Provision for tax % of PBT Profit after tax
Source: Company, Angel Research

2QFY12 1,584 296 18.7 639 40.3 239 15.1 287 18.2 1,461 92.3 30 153 9.6 118 132 167 10.5 27 16.4 139

2QFY11 1,455 225 15.5 496 34.1 203 13.9 208 14.3 1,131 77.8 24 348 23.9 95 85 338 23.2 114 33.7 224

yoy % 8.9 31.6 28.7 18.1 38.5 29.2 23.8 (56.1) 23.9 54.7 (50.7) (76.0) (37.8)

1QFY12 1,733 178 10.3 481 27.7 338 19.5 236 13.6 1,233 71.1 29 530 30.6 102 127 554 32.0 178 32.0 377

qoq % (8.6) 66.3 32.8 (29.1) 21.8 18.5 2.6 (71.2) 15.7 4.4 (69.9) (84.6) (63.0)

Exhibit 2: 2QFY2012 Actual vs. Angel estimates

(` cr) Net sales EBITDA EBITDA margin (%) PAT
Source: Company, Angel Research

Actual 1,584 153 9.6 139

Estimates 1,698 435 25.6 268

Variation (%) (6.7) (64.9) (1597)bp (48.1)

November 12, 2011

National Aluminium | 2QFY2012 Result Update

Result highlights
Higher realization leads to net sales growth
For 2QFY2012, Nalcos net sales grew by 8.9% yoy to `1,584cr (below our estimate of `1,698cr) mainly due to increased realization, despite lower volumes. Realization of alumina and aluminium grew by 29.4% and 23.1% yoy to US$400 and US$2,599, respectively. However, the company lost production of at least 6,000 tonnes of aluminium metal on account of coal supply disruptions by Mahanadi Coalfields. The company exported 183,000 tonnes of alumina in 2QFY2012 compared to 214,000 tonnes in 2QFY2011; while it exported 20,000 tonnes of aluminium in 2QFY2012 compared to 25,000 tonnes in 2QFY2011.

Exhibit 3: Quarterly revenue trend

2,000 1,800 1,600 1,400 1,200 50 45 40 35 30 25 20 15 10 5 0 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12

(`cr)

1,000 800 600 400 200 0

Net revenue (LHS)

Source: Company, Angel Research

yoy chg (RHS)

Higher power and fuel cost hits Nalcos margins

Raw-material cost as a percentage of net sales stood at 18.7% in 2QFY2012 compared to 15.5% in 2QFY2011 and 10.3% in 1QFY2012. Further, power and fuel cost as a percentage of net sales stood at 40.3% in 2QFY2012 compared to 34.1% in 2QFY2011 and 27.7% in 1QFY2012. The company had to import coal on account of lower supplies from Mahanadi Coalfields, which resulted in higher power cost. Hence, EBITDA decreased by 56.1% yoy to `153cr and EBITDA margin contracted by massive 1,427bp yoy and 2,094bp qoq to 9.6%. Other income grew by 54.7% yoy to `132cr and tax rate stood at 16.4% in 2QFY2012 compared to 33.7% in 2QFY2011. Consequently, the companys net profit decreased by 37.8% yoy to `139cr (significantly below our estimate of `268cr).

November 12, 2011

(%)

National Aluminium | 2QFY2012 Result Update

Exhibit 4: Quarterly EBITDA trend

600 500 400 35 30 25

Exhibit 5: Quarterly net profit trend

400 350 300 250 25 20 15 10 5 0 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 Net profit (LHS) Net profit margin (RHS)

(` cr)

(`cr)

15 10 5 0 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 EBITDA (LHS) EBITDA margin (RHS)

(%)

300 200 100 0

150 100 50 0

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 6: 2QFY2012 segmental performance

(` cr) Sales Chemicals Aluminium Electricity Gross sales Less intersegment Net sales EBIT Chemicals Aluminium Electricity Total Unallocated income Interest PBT EBIT margin (%) Chemicals Aluminium Electricity
Source: Company, Angel Research

2QFY12 621 1,218 523 2,362 (778) 1,584 121 (89) 50 82 84 167 10.5 19.5 (7.3) 9.5

2QFY11 587 1,123 663 2,372 (918) 1,455 136 (145) 308 299 39 338 23.2 23.3 (13.0) 46.4

% yoy 5.8 8.5 (21.1) (0.4) (15.2) 8.9 (11.0) (38.9) (83.8) (72.4) 114.1 -

1QFY12 646 1,355 478 2,479 (746) 1,733 163 242 75 480 75 554 32.0 25.2 17.9 15.7

% qoq (3.8) (10.1) 9.4 (4.7) 4.3 (8.6) (25.3) (136.7) (33.7) (82.8) 12.8 -

November 12, 2011

(%)

20

200

National Aluminium | 2QFY2012 Result Update

Investment rationale
Coal supply issues to continue
Nalco has been facing coal supply issues, which disrupted its operations during 2QFY2012. The company sources its annual coal requirement from Mahanadi Coalfields Ltd., but the supply is not evenly distributed. In our view, any disturbance in coal supply would increase the companys dependence on imported or external coal (which is very expensive compared to linkage coal), thereby negatively affecting its margins (as witnessed in 2QFY2012).

Limited growth visibility

Apart from the ongoing expansion plan, there is little clarity on the other proposed expansion plans as they are in various stages of financial closure and significant progress is yet to be made.

Outlook and valuation

Although Nalco enjoys high levels of backward integration, the cost of production remains very high for Nalco. Further, there is lack of clarity over the companys volume growth. At the CMP, Nalco is trading at valuations of 7.4x FY2012E and 4.5x FY2013E EV/EBITDA, higher than its peers. Hence, we recommend Neutral on the stock.

Exhibit 7: Key assumptions

FY2012E Sales volume (tonnes) Aluminium Alumina LME prices (US$/tonne) Aluminium Alumina
Source: Angel Research

FY2013E 579,600 883,390 2,300 370

382,680 1,110,360 2,225 360

Exhibit 8: Angel EPS forecast vs. consensus

Angel forecast FY2012E FY2013E
Source: Company, Angel Research

Bloomberg consensus 5.2 5.7

Variation (%) (25.8) (17.4)

3.9 4.7

November 12, 2011

National Aluminium | 2QFY2012 Result Update

Exhibit 9: EV/EBITDA band

60,000 50,000 40,000

(`cr)

30,000 20,000 10,000 0

Aug-09

May-08

Dec-07

Apr-06

Jan-10

Jun-10

Jul-07

Feb-07

Mar-09

Sep-06

Apr-11
Feb-11

Oct-08

2x

5x

8x

11x

14x

Source: Bloomberg, Angel Research

Exhibit 10: P/E band

200 180 160 140 120
(`)

100 80 60 40 20 0
Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Oct-11 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11

5x

10x

15x

20x

Source: Bloomberg, Angel Research

Exhibit 11: P/BV band

200 180 160 140 120 100 80 60 40 20 0

(`)

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Nov-10

Apr-11

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

1x

2x

3x

4x

Source: Bloomberg, Angel Research

November 12, 2011

Oct-11

Sep-11

National Aluminium | 2QFY2012 Result Update

Exhibit 12: Recommendation summary

Company CMP Target Reco. Mcap Upside/ P/E (x) P/BV (x) EV/EBITDA (x) RoE (%) RoCE (%) (downside) (` cr) (%) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E 18 31 20 7.4 15.5 8.1 8.3 6.4 12.7 6.3
7.8

(`) Price (`)

Hindalco
Nalco

129 60 117 118

151 154 142

Buy Buy Buy

24,639 15,438 39,460 49,774

0.8 1.3 0.9

1.8

0.7 1.2 0.8

1.5

5.1 7.4 3.2

4.7

4.8 4.5 2.3

3.5

11.0 8.6 11.2

23.7

11.3 9.9 12.6

20.9

7.6 6.5 9.6

22.7

7.9 9.5 11.0

20.0

- Neutral

Sterlite Hind. Zinc

Source: Company, Angel Research

November 12, 2011

National Aluminium | 2QFY2012 Result Update

Profit & loss statement

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Inc/(Expense) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Extraordinary Expense/(Inc.) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 5,474 486 4,989 4,989 (16.0) 2,769 521 1,226 553 469 2,220 (37.3) 44.5 281 1,939 (39.9) 38.9 2 555 22.3 2,492 (31.3) (25) 2,467 835 33.9 1,632 1,632 1,657 (30.6) 33.2 5,518 423 5,095 5,095 2.1 3,401 585 1,562 771 483 1,694 (23.7) 33.2 272 1,421 (26.7) 27.9 4 496 25.9 1,913 (23.2) 14 1,927 655 34.0 1,272 1,272 1,258 (24.0) 24.7 5,310 256 5,055 119 5,174 1.6 4,071 808 2,124 813 326 1,102 (34.9) 21.8 319 783 (44.9) 15.5 2 374 32.4 1,155 (39.6) 1,155 341 29.5 814 814 814 (35.3) 16.1 6,370 411 5,959 97 6,056 17.1 4,471 776 2,376 988 331 1,585 43.8 26.6 422 1,163 48.5 19.5 0 362 23.7 1,525 32.0 1,525 455 29.9 1,069 1,069 1,069 31.3 17.9 7,322 469 6,853 118 6,972 15.1 5,668 1,145 3,084 1,097 343 1,304 (17.7) 19.0 507 797 (31.5) 11.6 2 532 40.1 1,326 (13.0) 1,326 332 25.0 995 995 995 (7.0) 14.5 9,566 612 8,954 144 9,098 30.5 7,154 1,433 3,931 1,343 448 1,944 49.1 21.7 716 1,227 54.1 13.7 2 585 32.3 1,810 36.5 1,810 597 33.0 1,213 1,213 1,213 21.9 13.5

November 12, 2011

National Aluminium | 2QFY2012 Result Update

Balance sheet
Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders Funds Share Warrants Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 644 8,230 8,874 607 9,482 9,137 5,606 3,531 2,335 115 5,041 3,516 541 984 1,541 3,500 9,482 644 9,126 9,770 621 10,391 9,900 5,868 4,032 2,868 896 4,529 2,869 616 1,044 1,933 2,596 10,391 644 9,751 10,396 661 11,056 11,018 6,182 4,836 2,243 987 5,210 3,152 786 1,272 2,220 2,990 11,056 1,289 9,876 11,165 15 693 11,873 12,076 6,583 5,494 1,744 1,332 6,045 3,795 1,079 1,171 2,741 3,304 11,873 1,289 10,570 11,858 15 693 12,566 13,333 7,090 6,243 1,444 1,332 7,268 4,499 1,079 1,690 3,720 3,548 12,566 1,289 11,331 12,619 15 693 13,328 14,533 7,806 6,727 1,344 1,332 8,411 5,436 1,079 1,896 4,486 3,925 13,328 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

November 12, 2011

National Aluminium | 2QFY2012 Result Update

Cash flow statement

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments (Inc.)/ Dec. in loans and adv. Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2008 FY2009 FY2010 2,467 285 30 28 908 1,902 528 (528) (170) 3,687 3,516 1,927 273 361 60 682 1,938 13 387 (388) (647) 3,516 2,869 1,155 319 (20) 8.8 292 1,172 (678) 84 (593) 303.8 (304) 275 2,878 3,152 FY2011 FY2012E FY2013E 1,525 422 288 (55.8) 548 1,631 (833) 65 (768) 219 (219) 643 3,152 3,795 1,326 507 460 332 1,962 (957) (957) 301 (301) 704 3,795 4,499 1,810 716 560 597 2,489 (1,100) (1,100) 452 (452) 937 4,499 5,436

(1,544) (2,211)

(1,544) (2,198)

November 12, 2011

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National Aluminium | 2QFY2012 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio (%) Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA (0.4) (1.6) (0.4) (2.2) (0.4) (3.8) (0.5) (3.2) (0.5) (4.5) (0.5) (3.5) 0.5 481 4 419 17 0.5 525 2 717 (5) 0.5 427 13 718 (27) 0.5 498 7 970 (41) 0.5 498 7 970 (60) 0.6 440 7 970 (67) 21.8 3.2 19.7 14.3 3.2 13.6 7.3 2.7 8.1 10.1 2.1 9.9 6.5 1.9 8.6 9.5 1.7 9.9 38.9 66.1 1.4 35.2 35.2 27.9 66.0 1.4 25.8 25.8 15.5 70.5 1.2 13.4 13.4 19.5 70.1 1.3 17.1 17.1 11.6 75.0 1.4 11.8 11.8 13.7 67.0 1.7 15.9 15.9 6.4 6.4 7.4 1.5 34.4 4.9 4.9 6.0 1.3 37.9 3.2 3.2 4.4 0.6 40.3 4.1 4.1 5.8 0.9 43.3 3.9 3.9 5.8 1.0 46.0 4.7 4.7 7.5 1.5 49.0 9.3 8.1 1.7 2.5 2.4 5.3 1.2 12.3 10.0 1.6 2.1 2.3 6.9 1.1 19.0 13.6 1.5 1.0 2.2 10.2 1.0 14.4 10.4 1.4 1.5 1.7 6.5 0.9 15.5 10.3 1.3 1.7 1.4 7.4 0.8 12.7 8.0 1.2 2.5 1.0 4.5 0.7 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

November 12, 2011

11

National Aluminium | 2QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

National Aluminium No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

November 12, 2011

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