By Shradha Saraogi

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

-

-

-

INR5,000 (reduced from INR6,000)

IND AAA/Stable

Affirmed

Non-fund-based limits

-

-

-

INR7,750 (reduced from INR8,000)

IND A1+

Affirmed

KEY RATING DRIVERS

Integrated Operations: NALCO operates captive high-quality bauxite mines, which meet 100% of its alumina requirement for manufacturing aluminium. It also operates 1,200MW coal-based captive power plants, which are sufficient for its entire aluminium smelting capacity. For feeding coal, it has a fuel supply agreement with Mahanadi Coalfield Limited for around 85% of its requirements. This integration confers significant cost advantages, making NALCO one of the few low-cost producers of alumina across the world. Furthermore, NALCO’s facilities are located close to raw material sources, leading to savings in freight costs.

Liquidity Indicator – Superior: NALCO maintains a high cash balance (9MFY20: INR21.3 billion; FY19: INR31.4 billion; FY18: INR26.1 billion), primarily in the form of fixed deposits (almost 95% share), on which it earned interest income of INR2.4 billion in FY19 (FY18: INR1.8 billion). With the absence of any long-term liabilities on the balance sheet, there are no repayment obligations. Also, fund-based bank facilities of INR6 billion remained unutilised over the 12 months ended February 2020. The cash flow from operations was consistently positive over FY16-FY19, and increased to INR26.8 billion in FY19 (FY18: INR16.8 billion) due to improvement in the EBITDA. Ind-Ra expects NALCO to sustain its strong liquidity and net cash position in the near term.

Strong Credit Metrics despite Industry Headwinds: Despite deterioration in the EBITDA margins, NALCO has consistently maintained a negative net debt (debt less free cash) position for over FY15-FY19. Also, the interest coverage remained fairly comfortable over FY18-9MFY20 (9MFY20: 57x; FY19: 1,215x; FY18: 717x).

Volatile EBITDA Margins and Revenue: As an integrated player, NALCO has nearly fixed production costs, and any fluctuations in realisations directly affect its revenues and margins. In 9MFY20, NALCO’s EBITDA margin declined to 4.30% (9MFY19: 27.20%, FY19: 25.15%; FY18: 14.70%), mainly because average realisations of alumina and aluminium fell by about 38% yoy and 14% yoy, respectively, driven by a correction in their market prices on the London Metal Exchange (LME). Additionally, a shortage in the availability of coal from Mahanadi Coalfield led to higher power and fuel costs, as the company had to purchase additional high-cost power from the state grid and it also had to buy e-auction coal at a high cost to continue production from mid-July 2019 to November 2019. In 9MFY20, revenue declined by about 25% yoy to INR65.4 billion (FY19: INR115.0 billion; FY18: INR95.1 billion) due to the fall in realisations.

Though the coal supply resumed from December 2019, the average LME prices have sustained at the reduced levels due to a continued low demand; hence, Ind-Ra expects the EBITDA margin to be around 5% in FY20. The margins shall improve from FY21 owing to the normalisation of power costs. However, Ind-Ra estimates the margins to be low at 9%-10% in FY21 because of a likely downward pressure on prices, as demand would remain subdued due to the escalating US-China trade war and global economic slowdown.

Strong Profitability from Alumina Segment: NALCO’s EBITDA margin from the alumina segment, comprising around 33% of the net sales, continued to be volatile but remained high at 24.9% in 9MFY20 (FY19: 44.9%; FY18: 30.2%). The margin fell due to the decline in alumina realisations. The low production cost for alumina on account of its high-quality captive bauxite mine provides NALCO with the flexibility to sell additional alumina as and when aluminium prices are less remunerative than those of alumina, so as to maximise profitability.

In the aluminium segment, however, NALCO incurred losses in 9MFY20 (9MFY19: 14.6%; FY19: 14.8%; FY18: 9.8%) due to the correction in LME prices and escalated power costs due to the coal shortage, given that around 85% of total power is consumed by this segment. Overall, the alumina segment provides NALCO with the cushion to support margins even during downturns.

Large Capex for Alumina Refinery: NALCO, being a Navratna CPSE, was granted an additional mining lease of Pottangi bauxite mine (total resources – 75 million tonnes) in Koraput district near its existing refinery on allocation basis. The Indian Bureau of Mines approved the mining plan in July 2018. NALCO plans to add a fifth stream in its existing refinery at INR64.36 billion to increase the refining capacity by 44% to 3.275 million metric tonnes per annum (MTPA) and expects the facility to commence operations by December 2022. As alumina generates higher margins than aluminium, NALCO’s overall margins would improve once the operations stabilise. The capex is well spread and NALCO is likely to maintain leverage well below 1x during the capex period as it does not plan to take any additional debt. 


RATING SENSITIVITIES

Negative: Large debt-funded projects and/or a significant reduction in the cash balance, with a gross leverage ratio 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 (51.50% holding as on 31 December 2019). 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 has a 1,200MW of coal-based power plant, all in Odisha.

 

FINANCIAL SUMMARY 

Particulars

9MFY20

FY19

FY18

Net revenue (INR billion)

65.36

114.99

95.09

EBITDAR (INR billion)

2.81

28.92

13.97

EBITDAR margin (%)

4.30

25.15

14.70

EBITDAR interest coverage (x)

57

1,215

717

Gross adjusted leverage (x)

0.11

0.02

0.03

Source: NALCO, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating/Outlook

13 March 2019

27 December 2017

13 September 2016

Issuer rating

Long-term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Fund-based Limits

Long-term

INR5,000

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Non-fund-based Limits

Short-term

INR7,750

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. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Shradha Saraogi

    Analyst
    India Ratings and Research Pvt Ltd Room No. 1201, 12th Floor Om Towers 32, Chowringhee Road Kolkata 700 071
    +91 33 40302509

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121