National Aluminium Company Ltd (Nalco) is undertaking an ambitious expansion strategy that leads to cash flow constraints and even potential debt rises, analysts claim. Rs.6000 Crore is the capacity for expanding the aluminum refinery.
“A little flutter triggers Nalco’s refinery expansion project. We estimate that in FY 2021-23 there is negative free cash flow, as all the surplus cash is used, and Nalco will need to increase debt in FY2023 to sustain its expansion spending and to continue increasing investment” Kotak Institutional Equity said.
Cashflow pressures could also easily reduce its high dividend rates in the next few years. The dividend return of Nalco is based on the payouts it earned in FY20 at around 4.2 percent.
One good thing is that there is a shift in the dynamics of the aluminum industry. So far, the price of aluminum grew by about 20% on foreign markets in this financial year, which could boost up the income of Nalco. China’s demand was strong, with the weak US dollar continuing to lift prices.
In the meantime, due to cost controls and lower product prices, the company did better than the street estimates at the operating front in Q1. However, income attributable to interest, tax, and depreciation was down nearly 39% year-on-year, with a drop in revenues. The quarter saw lower prices of coal and carbon which helped to compensate for the decline in the operating profits.
Output was affected by COVID-19 with an annual contraction of 20% and 11% for alumina and aluminum production respectively. However, in the next quarter, performance is expected to increase.
However, high inventories are one of the challenges for the aluminum industry. “A supply surplus and sluggish costs could further cap aluminum prices upside down. The price of alumina to be 18 percent till the date Financial year2021.Despite the recent disruption in Alunorte, Brazil, the market remains well-supplied and we see a small upside, “Kotak analysts said in the study.
Analysts have, of course, already increased earnings estimates in financial year 21 with a lower base and higher expectations. Evaluations, however, remain on the higher side; and the lack of positive results combined with the tense cash flow could seriously affect the stock price.
