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 operates 1,200MW coal-based captive power plants and has a fuel supply agreement with Mahanadi Coalfield Limited (MCL) for around 85% of its requirements. It also operates bauxite mines which meet its 100% aluminium requirement for manufacturing alumina. NALCO’s facilities are located close to raw material sources, leading to savings in freight costs. 

Robust Revenue and Credit Metrics; Strong Liquidity:
In FY18, revenue increased around 26% yoy to INR95.09 billion, primarily due to a 19.55% increase in realisation of aluminium as well as premium. It has maintained a negative net debt (debt less free cash) position since FY12. Also, interest cover has remained fairly comfortable (FY18: 717x; FY17: 400x). NALCO has a high cash balance (FY18: INR26.12 billion; FY17: INR22.85 billion) primarily as fixed deposits. Ind-Ra expects NALCO to sustain its strong liquidity position in the near term. NALCO also has unutilised fund-based bank facilities to the tune of INR6 billion. 

Large Capex for Alumina Refinery:
NALCO was granted the mining lease of Pottangi bauxite mine by the government of Odisha in Koraput district 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 and expects commencement in three to four 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 leverage well below 1x during the capex period. 

Strong EBITDA from AluminaNALCO’s EBITDA margin from the alumina segment continued to be high at 53.00% in FY18 (FY17: 44.48%; FY16: 45.16%), on the back of improved realisation and cost advantages on account of its high-quality captive bauxite mine. The low production cost for alumina provides NALCO with the flexibility to sell additional alumina when aluminium prices are less remunerative than alumina’s so as to maximise profitability. In 9MFY19, EBIT margin from alumina was 44.93% (9MFY18: 20.69%; FY18: 24.73%) and that for aluminium was 11.24% (6.34%; 5.86%). 

Healthy but Volatile EBITDA Margin:
NALCO’s EBITDA margin increased to 27.2% in 9MFY19 (FY18: 14.70%; 9MFY18: 13.64%), mainly due to higher sales realisation. NALCO being an integrated aluminium producer with captive bauxite mines benefits with increase in London Metal Exchange prices of alumina and aluminium. The margin improved to 34% in 1QFY19 as realisation was high and corrected to 18.87% in 3QFY19, following a correction in London Metal Exchange aluminium (around 4% qoq) and alumina prices (around 15% qoq), as witnessed in the past. Ind-Ra expects EBITDA margin to be around 25% in FY19 and normalise in FY20.


RATING SENSITIVITIES

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


COMPANY PROFILE

NALCO is a Navratna Central Public Sector Enterprise under Ministry of Mines, the government of India. The company is a group ‘A’ CPSE, having integrated and diversified operations in mining, metal and power. Established in 1981, the company manufactures alumina (2.275MTPA) and aluminium (0.46MTPA) and generates 1,200MW of coal-based power in Odisha. 

FINANCIAL SUMMARY
 

Particulars

FY18

FY17

Net revenue (INR billion)

95.09

75.58

EBITDAR (INR million)

13.97

10.80

EBITDAR margin (%)

14.70

14.28

EBITDAR interest coverage (x)

717

401

Gross adjusted leverage (x)

0.03

0.05

Source: NALCO, Ind-Ra

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating/Outlook

27 December 2017

13 September 2016

22 June 2015

Issuer rating

Long-term

-

IND AAA/Stable

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

IND AAA/Stable

Non-fund-based Limits

Short-term

INR8,000

IND A1+

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.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: 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

    Associate 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

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121