• Topline of Rs18.4bn was quite higher than our estimate of Rs16bn on the back of strong aluminium product premiums

• Aluminium spot product premiums continued to increase on a qoq basis

• Alumina sales volume of 0.37mn was marginally higher than our estimate

• Operating profit of Rs3.1bn was higher than our estimate due to higher product premiums and increase in share of external alumina sales volume

• The stock has run up ahead of fundamentals; downgrade to sell with a price target of Rs46

Strong volumes boost topline

NALCO’s Q4 FY14 topline of Rs18.4bn was quite higher than our estimate of Rs16bn on the back of strong aluminium product premiums. Alumina sales remained strong during the quarter aided by sales of previous quarter inventory. External alumina sales volume stood at 0.37mn tons against 0.32mn tons in Q4 FY13 and 0.31mn tons in Q3 FY14. Production of alumina was higher by 7.1% qoq, but was lower by 6.2%5 on a yoy basis. Aluminium production remained flat on a qoq basis at 77,000 tons. However, on a yoy basis metal production was lower by 21.3% yoy as the company had shut down 300 pots of the total 960 pots over the last two quarters. Sales volume of 81,000 tons was higher than our estimate due to some inventory liquidation.

On a segmental basis, alumina division revenue jumped 13.7% yoy to Rs10.6bn on account of higher volumes and realization. Revenue from aluminium business fell sharply by 16.4% yoy to Rs10.7bn on account of lower aluminium production. Aluminium realizations were higher by 1% yoy led by rupee depreciation and higher product premiums. We were quite surprised by the increase in product premiums on a qoq basis. The management believes that aluminium production would remain flat in FY15 due to unavailability of cheaper coal.

Strong product premiums and lower power costs lead to 51.3% qoq increase in operating profit

Operating profit for the quarter stood at Rs3.1bn quite higher than our estimate of Rs2.1bn. The outperformance in operating profit was led by higher sales volume and strong product premiums. Power costs as a % of sales declined from 31.6% in Q3 FY14 to 26% in Q4 FY14 due to increase in availability of linkage coal. The management has mentioned that they would avoid consuming imported coal. The company’s power production during the declined by 18% yoy as the company’s focus was to avoid expensive coal. However, the impact of lower power costs was somewhat offset by an increase in raw material costs. Raw material costs as a % of sales increased from 15.3% in Q3 FY 14 to 19.2% in Q4 FY14. EBIT from the alumina division increased  52% qoq to Rs2.4bn due to higher alumina prices and volumes. However, on a yoy basis it was lower by 8.3% due to lower sales volume.

Running ahead of fundamentals; downgrade to sell with a price target of Rs46

NALCO’s operating profit has improved over the last one year on the back of higher external alumina sales and increase in aluminium metal spot premiums. However, the supply of linkage coal has not been steady leading to variations in its quarterly numbers. We have lowered our metal production estimates inline with the management guidance and have increased our metal realizations for FY15 and FY16 to incorporate the strong product premiums in the market. Lower product premiums coupled with an appreciation in the rupee would lead to a decline in operating profit in FY16. We believe the upside for the stock would be capped around current levels and downgrade the stock from Market Performer rating to SELL with a price target of Rs46.