Kotak bullish on Nalco due to rising aluminium prices; upgrades rating to ‘buy’

Aluminium prices have scaled multi-year highs after aluminium smelters in China's Xinjiang, which accounts for around 20 percent of Chinese aluminium output were told to curtail their production. Therefore, analysts estimate that this could amount to around 10 percent of their total output, which is not a very large number, but this production cut would be extended to other smelters as well.

So, brokerage house Kotak has turned more positive on aluminium prices, and expects the global aluminium market to get into deficit this year itself. Earlier, they had estimated that in 2022, there would be a deficit but now they say it could happen in 2021 itself. Some of the key factors that would lead to this deficit are floods, power shortages, as well as strict energy consumption policies. The first two factors, that is the floods and power shortages could be transient in nature but the third factor is the one that would likely lead to deficit of aluminium. So, the multi-year deficit market, as well as a tepid supply could keep aluminium prices elevated. The aluminium price forecast is roughly around 4-9 percent for the next couple of years.

Kotak has turned bullish on Nalco and has upgraded the stock to ‘buy’ from ‘sell’. They have also increased EBITDA estimates by around 15 to 37 percent for the next couple of years, which in turn increases their fair value to around Rs 100 from around Rs 80 earlier. The key factors they cite is aluminium global prices will be higher owing to the deficit. The stock is trading at around 3.6 times EV per EBITDA which they believe is attractive, and according to them strong operating earnings would fund the growth capex which was a fear for the street. However, Kotak believes Nalco will generate enough money to fund their capex.