Shares of National Aluminium Co. gained after Kotak Institutional Equities upgraded its rating on the Navratna PSU, citing a rise in prices globally, higher earnings and positive free cash flow.
The brokerage upgraded the aluminium stock to ‘buy' from ‘sell', with a fair value of Rs 100 apiece, according to its report.
Kotak Institutional Equities sees growing supply disruption and uncertainty in aluminum production in China led by floods, power shortages and policy of ‘dual control' of energy consumption. A stronger-than-estimated demand and lower supply, according to the brokerage, suggest a deficit aluminum market in 2021. “A multi-year deficit market and tepid supply response should keep prices higher for longer to incentivise new capacity.”
The brokerage increases its aluminum price assumptions by 4% and 9% to $2,500 and $2,475 a tonne for FY22 and FY23, respectively. It also estimates cost pressures and supply disruptions to keep alumina prices supported, and raised its price forecast to $300/336 per tonne for FY2022/24. Alumina comprises 70% of Nalco's Ebitda.
Nalco's earnings, the report said, are highly sensitive to aluminum prices given its higher cost structure. “We increase Nalco's Ebitda by 15%/37% for FY2022/23 as we factor higher commodity prices.” Higher earnings, it said, help the company fund its alumina refinery expansion capex without diluting its cash balance. A positive free cash flow despite growth capex would help it sustain about 5% dividend yield with 35% payout, the report said.
Shares of Nalco gained as much as 7.3% to Rs 84.6 apiece in early trade on Friday. Of the 10 analysts tracking the company, seven have a ‘buy' rating, one suggests a ‘hold' and two recommend a ‘sell', according to Bloomberg data. The average of 12-month consensus price targets implies an upside of 7.9%.
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