By Rohit Sadaka

India Ratings and Research (Ind-Ra) has affirmed National Aluminium Company Limited’s (NALCO) Long-Term Issuer Rating at ‘IND AAA’. The Outlook is Stable. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

Strong EBITDA From Alumina: NALCO’s EBITDA margin from alumina continued to be high but declined to 45.16% in FY16 (FY15: 48.99%) due to a fall in realisations. The margin from alumina remains high due to cost advantages on account of its high-quality captive bauxite mine. The low production cost for alumina provides NALCO the flexibility to sell additional alumina when aluminium prices are less remunerative compared with alumina so as to maximise profitability. The margin from aluminium is highly dependent on London Metal Exchange (LME) prices as well as premium (charged over LME prices for immediate delivery), which declined during FY16 resulting in NALCO’s EBITDA margin declining to 0.87% (FY15: 17.36%).

Strong Liquidity to Continue:
NALCO’s strong liquidity is likely to be sustained in the near term despite the use of free cash of INR28.35bn for share buy-back in FY17. The company had a cash balance of INR49.33bn mostly in the form of fixed deposits at FYE16 (FYE15: INR46.23bn, FY14: INR33.71bn). NALCO also has unutilised fund-based bank facilities. NALCO has maintained a negative net debt position.

Integrated Operations:
NALCO owns a 1,200mw power plant and has a fuel supply agreement with Mahanadi Coalfield Limited for around 80% of its coal requirements. It also has a mining lease for its bauxite mine to manufacture alumina, a raw material for aluminium smelter. NALCO’s facilities are located in close proximity to raw material sources, leading to savings in freight costs.

Deterioration in EBITDA Margin:
The company’s EBITDA margin fell to 13.8% in FY16 (FY15: 23.1%) as against the agency’s expectation of the margin remaining at 16%-20% due to a higher-than-expected decline in sales realisations of aluminium. The decline in realisations was by around 18% in FY16 on the back of a decline in average LME prices by around 16% as well as a decline in premiums. Ind-Ra expects the realisations to remain low and therefore the EBITDA margins to remain under pressure. Revenue also declined to INR68.16bn in FY16 (FY15: INR73.83bn) despite an increase in sales volume due to a fall in realisations.

Large Capex for Alumina Refinery:
NALCO was granted the mining lease for Pottangi bauxite mine by the government of Odhisa in Koraput district, Odisha near its existing refinery in 1QFY17. After the allocation of the mine, NALCO is pursuing the addition of a fifth stream in its existing refinery at an estimated cost of INR56bn. As alumina generates higher and more stable margins than aluminium, this will lead to stability in NALCO’s margins once operations stabilise.


RATING SENSITIVITIES

Negative: Large debt-funded projects and/or a significant reduction in the cash balance, leading to gross leverage of above 1x, could result in a negative rating action.
 


COMPANY PROFILE

NALCO is a Central Public Sector Enterprise Navratna under the Ministry of Mines, which is held by the government of India. Established in 1981, the company manufactures alumina (2.275mtpa) and aluminium (0.46mtpa) and has a 1,200mw captive power plant in Odisha.

NALCO’s ratings:
- Long-Term Issuer Rating: affirmed at ‘IND AAA’; Outlook Stable
- INR6,000m fund-based limits: affirmed at Long-term ‘IND AAA’; Outlook Stable
- INR8,000m non-fund-based limits: affirmed at Short-term ‘IND A1+’
 



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Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Rohit Sadaka

    Director
    India Ratings and Research Pvt Ltd Room No. 1201, 12th Floor Om Towers 32, Chowringhee Road Kolkata 700 071
    +91 33 40302503

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121