3QFY2012 Result Update | Base Metals

February 7, 2012

National Aluminium
Performance Highlights
 

REDUCE
CMP Target Price `61 `53
12 months
yoy % 0.4 (83.6) (80.0) 2QFY12 1,584 153 9.6 139 qoq % (9.7) (58.1) (516)bp (63.2)

Particulars (` cr) Net sales EBITDA EBITDA margin (%) Net profit

3QFY12 1,430 64 4.5 51

3QFY11 1,425 390 256

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

27.3 (2,287)bp

Base Metals 15,695 0.8 120/48 80,025 5 17,622 5,335 NALU.BO NACL@IN

Source: Company, Angel Research

For 3QFY2012, National Aluminium’s (Nalco) profitability was significantly below our expectations on account of higher-than-expected raw-material and power and fuel costs. We recommend Reduce on the stock. Net sales records modest growth: For 3QFY2012, Nalco’s net sales reported 0.4% yoy growth to `1,430cr (below our estimate of `1,770cr). Alumina realization decreased by 10.5% to `18,263 and aluminium realization decreased by 3.7% yoy `115,545. Higher input and energy costs hit margins: Raw-material costs and power costs grew by 99.2% yoy and 28.1% yoy to `239cr and `568cr, respectively. Hence, EBITDA decreased by massive 83.6% yoy to `64cr and EBITDA margin contracted by 2,287bp yoy to 4.5%. Other income, however, grew by 46.4% yoy to `131cr. Consequently, net profit decreased by 80.0% yoy to `51cr (significantly below our estimate of `224cr). Update on Utkal coal block: Nalco received compliance letter for its Utkal coal block during September 2011. However, there is lack of clarity on the completion of other regulatory formalities in the near term. Hence, production from this block is unlikely to start in FY2013 in our view. Outlook and valuation: Although Nalco has captive bauxite mines, the cost of aluminium production remains very high on account of high power costs. Further, there is lack of clarity over the company’s future expansion plans. At the CMP, Nalco is trading at valuations of 11.4x FY2012E and 8.6x FY2013E EV/EBITDA, significant premium to its peers. Hence, valuing the stock at 7.0x FY2013E EV/EBITDA, we derive a target price of `53 and recommend Reduce 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 4.2 3.4

Abs. (%) Sensex Nalco

3m 0.3

1yr (2.3)

3yr 89.5 29.0

(4.0) (42.0)

FY10 5,055 (0.8) 814 (35.3) 3.2 21.8 19.3 1.5 8.1 7.3 2.3 10.5

FY11 5,959 17.9 1,069 31.3 4.1 26.6 14.7 1.4 9.9 10.1 1.8 6.7

FY12E 6,332 6.3 708 (33.8) 2.7 14.7 22.2 1.4 6.2 3.8 1.7 11.4

FY13E 8,049 27.1 832 17.6 3.2 16.2 18.9 1.3 7.0 5.3 1.4 8.6

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

Please refer to important disclosures at the end of this report

1

National Aluminium | 3QFY2012 Result Update

Exhibit 1: 3QFY2012 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 EBITDA % 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

3QFY12 1,430 239 16.7 568 39.7 301 21.1 276 19.3 1,385 96.8 19 64 4.5 123 131 71 5.0 20 28.1 51

2QFY11 1,425 120 8.4 444 31.1 231 16.2 259 18.2 1,054 73.9 18 390 27.3 103 89 376 26.4 120 31.9 256

yoy % 0.4 99.2 28.1 30.5 6.6 31.4 2.8 (83.6) 19.9 46.4 (81.1) (83.3) (80.0)

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

qoq % (9.7) (19.2) (11.0) 25.8 (3.9) (5.2) (38.4) (58.1) 4.7 (0.9) (57.3) (27.0) (63.2)

Exhibit 2: 3QFY2012 – Actual vs. Angel estimates
(` cr) Net sales EBITDA EBITDA margin (%) PAT
Source: Company, Angel Research

Actual 1,430 64 4.5 51

Estimates 1,770 301 17.0 224

Variation (%) (19.2) (78.8) (1,253)bp (77.2)

February 7, 2012

2

National Aluminium | 3QFY2012 Result Update

Result highlights
Net sales records modest growth
For 3QFY2012, Nalco’s net sales grew by 0.4% yoy to `1,430cr (below our estimate of `1,770cr). Alumina realization decreased by 10.5% to `18,263 and aluminium realization decreased by 3.7% yoy `115,545. Despite a 13.0% yoy decline in dollar-based LME aluminium prices, Nalco’s realization declined by only 3.7% yoy due to INR depreciation against the USD.

Exhibit 3: Quarterly revenue trend
2,000 1,800 1,600 1,400 1,200 45 40 35 30

(`cr)

1,000 800 600 400 200 0 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12

20 15 10 5 0

Net revenue (LHS)

yoy chg (RHS)

Source: Company, Angel Research

Higher raw-material and power costs hit Nalco’s margins
Raw-material costs as a percentage of net sales stood at 16.7% in 3QFY2012, compared to 8.4% in 3QFY2011. Amongst key inputs, prices of caustic soda, CP coke, CP pitch and aluminium fluoride increased by 36.8%, 22.7%, 38.5% and 33.2%, respectively. Further, power cost as a percentage of net sales stood at 39.7%, compared to 31.1% in 3QFY2011. Hence, EBITDA decreased by massive 83.6% yoy to `64cr and EBITDA margin contracted by 2,287bp yoy to 4.5%. Other income, however, grew by 46.4% yoy to `131cr. Consequently, net profit decreased by 80.0% yoy to `51cr (significantly below our estimate of `224cr).

February 7, 2012

(%)

25

3

National Aluminium | 3QFY2012 Result Update

Exhibit 4: Quarterly EBITDA trend
600 500 400 35 30 25

Exhibit 5: Quarterly net profit trend
400 350 300 250 20 15 10 5 0 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 Net profit (LHS) Net profit margin (RHS) 25

(` cr)

(`cr)

(%)

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

200 100 0

150 100 50 0

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 6: 3QFY2012 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

3QFY12 613 1,132 466 2,212 (782) 1,430 134 (153) 16 (3) 74 167 11.7 21.9 (13.5) 3.4

3QFY11 491 1,159 250 1,900 (475) 1,425 113 348 (127) 334 42 376 26.4 23.1 30.0 (50.7)

% yoy 24.9 (2.3) 86.7 16.4 64.7 0.4 18.6 77.5 -

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

% qoq (1.3) (7.0) (10.8) (6.4) 0.4 (9.7) 10.7 (103.3) (12.2) -

Update on Utkal coal block
Nalco received compliance letter for its Utkal coal block during September 2011. However, there is lack of clarity on the completion of other regulatory formalities in the near term. Hence, production from this block is unlikely to start in FY2013 in our view.

February 7, 2012

(%)

300

20

200

4

National Aluminium | 3QFY2012 Result Update

Investment rationale
Coal supply issues to continue
Nalco has been facing coal supply issues, which disrupted its operations during April–December 2011. 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 company’s dependence on imported or external coal (which is very expensive compared to linkage coal), thereby negatively affecting its margins (as witnessed in 3QFY2012).

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
Aluminium prices have declined by over 20% in the past three-four months. Further, Nalco has been facing issues on coal quality and supply front. Hence, despite increasing capacity, the company has currently shut its 120 out of 960 pot lines in its smelters. Looking ahead, we expect Nalco to operate its aluminium smelters at 70% utilization levels during FY2013, as operating at higher levels would require higher quantity of expensive imported coal (which has hit its margins over the last two quarters). Although Nalco has captive bauxite mines, the cost of aluminium production remains very high on account of high power costs. Further, there is lack of clarity over the company’s future expansion plans. At the CMP, Nalco is trading at valuations of 11.4x FY2012E and 8.6x FY2013E EV/EBITDA, significant premium to its peers. Hence, valuing the stock at 7.0x FY2013E EV/EBITDA, we derive a target price of `53 and recommend Reduce on the stock.

Exhibit 7: Key assumptions
FY2012E Sales volume (tonnes) Aluminium Alumina LME prices (US$/tonne) Aluminium Alumina
Source: Angel Research

FY2013E 447,600 1,021,390 2,200 370

382,680 732,360 2,225 360

Exhibit 8: Angel EPS forecast vs. consensus
Angel forecast FY2012E FY2013E
Source: Company, Angel Research

Bloomberg consensus 3.9 4.5

Variation (%) (29.6) (27.8)

2.7 3.2

February 7, 2012

5

National Aluminium | 3QFY2012 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

Apr-11

Oct-08

Mar-09

2x

5x

8x

11x

14x

Source: Bloomberg, Angel Research

Exhibit 10: P/E band

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 Apr-11 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11

1x

2x

3x

4x

Source: Bloomberg, Angel Research

February 7, 2012

Nov-10

Feb-12

Sep-06

Sep-11

6

National Aluminium | 3QFY2012 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 6 (14) 13 8.8 22.2 7.7 10.8 7.6 18.9 6.6
9.2

(`) Price (`)

Hindalco
Nalco

153 61 122 139

162 Accum. 29,412 53 Reduce 15,695 138 Accum. 41,050 - Neutral 58,922

0.9 1.4 0.9
2.2

0.8 1.3 0.8
1.8

5.7 11.4 2.8
7.0

5.3 8.6 2.2
5.1

11.0 6.2 12.1
22.0

11.3 7.0 12.7
21.3

7.6 3.8 11.3
20.9

7.9 5.3 11.5
20.4

Sterlite Hind. Zinc

Source: Company, Angel Research

February 7, 2012

7

National Aluminium | 3QFY2012 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 19.5 362 23.7 1,525 32.0 1,525 455 29.9 1,069 1,069 1,069 31.3 17.9 6,764 433 6,332 118 6,450 6.5 5,521 1,057 2,849 1,013 601 929 (41.4) 14.7 465 463 (60.2) 7.3 2 532 53.6 993 (34.9) 993 285 28.7 708 708 708 (33.8) 11.2 8,600 550 8,049 144 8,193 27.0 6,890 1,344 3,614 1,207 724 1,303 40.4 16.2 644 659 42.3 8.2 2 585 47.1 1,242 25.1 1,242 410 33.0 832 832 832 17.6 10.3

February 7, 2012

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National Aluminium | 3QFY2012 Result Update

Balance sheet
Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders’ Funds 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 10,283 11,571 15 693 12,280 13,633 7,048 6,585 1,444 1,332 6,408 3,767 1,079 1,562 3,489 2,919 12,280 1,289 10,753 12,042 15 693 12,750 16,033 7,692 8,341 1,344 1,332 5,985 3,134 1,079 1,772 4,251 1,734 12,750 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

February 7, 2012

9

National Aluminium | 3QFY2012 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 Inc./(Dec.) in loans Dividend paid Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2008 FY2009 FY2010 FY2011 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 1,525 422 288 (55.8) 548 1,631 (833) 65 (768) 219 (219) 643 3,152 3,795 FY2012E 993 465 357 285 1,530 (1,257) (1,257) 301 (301) (28) 3,795 3,767 FY2013E 1,242 644 552 410 2,028 (2,300) (2,300) 361 (361) (633) 3,767 3,134

(1,544) (2,211)

(1,544) (2,198)

February 7, 2012

10

National Aluminium | 3QFY2012 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) (0.4) (5.5) (0.4) (3.4) 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 (62) 0.5 440 7 970 (69) 21.8 3.3 19.7 14.3 3.3 13.6 7.3 2.7 8.1 10.1 2.2 9.9 3.8 2.0 6.2 5.3 1.8 7.0 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 7.3 71.3 1.2 6.3 6.3 8.2 67.0 1.3 7.1 7.1 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 2.7 2.7 4.6 1.0 44.9 3.2 3.2 5.7 1.2 46.7 9.5 8.2 1.8 2.5 2.4 5.4 1.3 12.5 10.2 1.6 2.1 2.3 7.0 1.1 19.3 13.8 1.5 1.0 2.3 10.5 1.0 14.7 10.5 1.4 1.4 1.8 6.7 0.9 22.2 13.4 1.4 1.6 1.7 11.4 0.9 18.9 10.6 1.3 2.0 1.4 8.6 0.9 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

February 7, 2012

11

National Aluminium | 3QFY2012 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%)

February 7, 2012

12