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. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based limits

-

-

-

INR6,000

IND AAA/Stable

Affirmed

Non-fund-based limits

-

-

-

INR8,000

IND A1+

Affirmed

KEY RATING DRIVERS

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 proximity to raw material sources, leading to savings in freight costs. 


Sustained High EBITDA Margin:
The company’s EBITDA margin improved marginally to 14.3% in FY17 (FY16: 13.8%). The improvement was backed by around 6% rise in average London Metal Exchange (LME) prices as well as an improvement in premiums in FY17. Ind-Ra expects the realisations to sustain and therefore the EBITDA margins to remain stable in FY18. Revenue also increased to INR75.43 billion in FY17 (FY16: INR68.16 billion) due to an increase in sales volume coupled with realisations. 

During 1HFY18, revenue increased to INR42.57 billion (1HFY17: INR34.6 billion) and EBITDA margin to 13.2% (9.06%) on back of higher sales volume as well as realisation. 

Strong EBITDA from Alumina
: NALCO’s EBITDA margin from alumina continued to be high at 47.84% in FY17 (FY16: 50.06%; FY15: 48.99%) on the back of sustained realisation and 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’s so as to maximise profitability. The margin from aluminium highly depends on LME prices as well as the premium charged over LME prices for immediate delivery, which increased marginally by 6% during FY17. This resulted in NALCO’s EBITDA margin from aluminium remaining low at 0.15% (FY16: 2.08%; FY15: 17.36%).

Robust Liquidity to Continue:
NALCO’s strong liquidity is likely to be sustained in the near term, despite the use of free cash of INR28.35 billion for a share buy-back in FY17. The company had a cash balance of INR27.89 billion in 1HFY18 (FYE17: INR22.85 billion; FYE16: INR49.33 billion), mostly in the form of fixed deposits. NALCO also has unutilised fund-based bank facilities. It has maintained a negative net debt position since FY12. NALCO had debt outstanding of INR511 million at FYE17 (FY16: nil), in the form of bill discounting from banks, resulting in low gross leverage of 0.05x (nil).

Large Capex for Alumina Refinery:
NALCO was granted the mining lease of Pottangi bauxite mine by the government of Odisha 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 INR56 billion over the next five years. As alumina generates higher and more stable margins than aluminium, this will lead to stability in NALCO’s margins once operations stabilise. As the capex is well spread, NALCO is likely to maintain low leverage during the capex period.


RATING SENSITIVITIES

Negative: Large debt-funded projects and/or a significant reduction in the cash balance, leading to gross leverage exceeding 1x on a sustained basis, 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. 

FINANCIAL SUMMARY

 

Particulars (Standalone)

FY17

FY16

Net revenue (INR billion)

75.43

68.16

EBITDAR (INR million)

10.80

9.38

EBITDAR margin (%)

14.3

13.8

EBITDAR interest coverage (x)

401

775

Gross adjusted leverage (x)

0.05

0.0

Source: NALCO, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating/Outlook

13 September 2016

22 June 2015

Issuer rating

Long-term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Fund-based Limits

Long-term

INR6,000

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Non-fund-based Limits

Short-term

INR8,000

IND A1+

IND A1+

IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

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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India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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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