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

IND AAA/Stable

Affirmed

Non-fund-based limits

-

-

-

INR7,750

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 – Adequate: NALCO maintains a high cash balance (end-1HFY21: INR14.3 billion; FYE20: INR14.23 billion; FYE19: INR31.4 billion), primarily in the form of fixed deposits (almost 95% share), on which it earned interest income of INR0.4 billion in 1HFY21(FY20: INR1.4 billion; FY19: INR2.2 billion). With the absence of any long-term liabilities on the balance sheet, there are no repayment obligations. Furthermore, the average utilisation of its fund-based limits (INR5 billion) remained low at around 5% during the 12 months ended December 2020. NALCO did not avail the Reserve Bank of India-prescribed moratorium for its working capital facilities. The cash flow from operations (CFO) was positive over FY16-FY19, but turned negative to INR1.2 billion in FY20 on an exceptional basis (FY19: INR26.7 billion; FY18: INR16.8 billion) due to low absolute EBITDA and increased working capital requirements. Ind-Ra expects NALCO to sustain its adequate liquidity with positive CFO over FY21-FY23. 

Strong Credit Metrics despite Industry Headwinds: NALCO maintained a negative net debt (debt less free cash) position over FY15-FY20 and continued the trend in 1HFY21, despite the demand setback on the back of the COVID-19 outbreak, due to significantly high free cash balances. Also, the interest coverage has remained fairly comfortable (1HFY21: 112x; FY20: 85x; FY19: 1,215x) due to marginal interest obligations. Ind-Ra believes post the planned capex outflow, the likely dividend payout and the announced buyback of shares, while the negative net debt position will be maintained in FY21, NALCO will have to borrow external funds in FY22 and FY23, leading to positive net debt. Nevertheless, the net leverage is likely to be well below 1.5x in FY22 and FY23, considering the likely healthy EBITDA generation over the medium term.  

Strong Profitability from Alumina Segment: NALCO’s EBITDA margin from the alumina segment, comprising around 28% of the net sales in 1HFY21, continued to be volatile but remained high at 26.7% in 1HFY21 (FY20: 26.0%; FY19: 44.9%; FY18: 30.2%). The margin improved despite a decline in alumina realisations, due to improved operational efficiencies. The low production cost for alumina on account of its high-quality captive bauxite mine provides NALCO 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 earned 9.5% EBITDA margin in 1HFY21 (FY20: negative 0.6%; FY19: 14.8%; FY18: 9.8%) despite a decline in the prices on London Metal Exchange post the COVID-19 outbreak. The margin improved as the issues pertaining to escalated power costs due to the coal shortage in 1HFY20 were sorted, given that around 85% of the total power is consumed by this segment. Overall, the alumina segment provides NALCO the cushion to support margins even during downturns. 

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 1HFY21, the revenue fell around16% yoy to INR37.5 billion (FY20: INR84.7 billion; FY19: INR115.0 billion; FY18: INR95.1 billion) due to reduced overall volumes and realisations on the back of COVID-19-led disruptions. 

Furthermore, NALCO’s EBITDA margin improved to 10.78% in 1HFY21 (1HFY20: 5.54%; FY20: 5.77%; FY19: 25.15%; FY18: 14.70%) despite around 19% and around 11% correction in the year-on-year realisations (in USD) for alumina and aluminium, respectively. Such an improvement was on the back of the uninterrupted coal supply over 1HFY21 against the increased overall power and fuel cost in 1HFY20 due to the coal shortage over mid-July 2019 to November 2019 amid falling realisations, which had squeezed margins. NALCO reported abnormal profits in 1QFY19 (34%) and 2QFY19 (28%) with an increase in the international prices of alumina and the London Metal Exchange prices of aluminium. The margin corrected in 2HFY19 (18%-19%) following a correction in aluminium prices. 

In 3QFY21, the average aluminium realisations improved 10% qoq, while the sales volumes for high-margin alumina improved 20% qoq at sustained realisations, indicating an improvement in the margins. Furthermore, the realisations have sustained at higher levels for alumina and for aluminium since 1 January 2021. Ind-Ra expects EBITDA margin to be around 14% in FY21 and dip to 12%-13% in FY22 on the back of a likely correction in aluminium prices resulting from an over-supply in the market post the normalisation of demand. 

Large Capex for Alumina Refinery: NALCO, being a Navratna Central Public Sector Enterprise (CPSE), was granted an additional mining lease of Pottangi bauxite mine (total resources – 110 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 now commence operations by June 2023 (earlier due in December 2022; delayed due to COVID-19-led disruptions). Being a low-cost alumina producer, NALCO generates high margins in the alumina segment. NALCO’s overall margins will improve once the alumina expansion operations stabilise. The capex is well spread and NALCO is likely to maintain the net leverage well below 1.5x during the capex period despite additional debt likely to be availed in FY22 and FY23.


RATING SENSITIVITIES

Negative: Higher-than-expected debt-funded projects and/or deterioration in the free cash balance leading to a significant increase in the net leverage increasing above 1.5x, on a sustained basis, will be negative for the ratings.
 


COMPANY PROFILE

NALCO is a Navratna CPSE under the Ministry of Mines, the government of India (51.50% holding as on 31 December 2020). 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

1HFY21

FY20

FY19

Net revenue (INR billion)

37.55

84.72

114.99

EBITDAR (INR billion)

4.05

4.89

28.92

EBITDAR margin (%)

10.78

5.77

25.15

EBITDAR interest coverage (x)

112

85

1,215

Gross adjusted leverage (x)

0.08

0.03

0.02

Source: NALCO, Ind-Ra


 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating/Outlook

5 March 2020

13 March 2019

27 December 2017

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. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

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-700071, India
    +91 33 40302509

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121