Expansion Projects May Boost Aluminium Output, But Market Volatility And CapEx Risks Could Affect Future Earnings

Key Takeaways

• NALCO's strategic expansions and zero-debt position are poised to boost production capacity and lower costs, enhancing long-term revenue and earnings.
  
• Investments in value-added products and India's growth prospects suggest diversified revenue streams and improved profitability for NALCO.
  
• Exposure to volatile commodity markets and operational, financial, and tariff risks could significantly impact NALCO's future revenues, debt levels, and profit margins.

Catalysts

Engages in the manufacture and sale of alumina and aluminum products in India and internationally.

• NALCO's ongoing expansion projects, including the new smelter and refinery capacity, are expected to significantly increase production volumes, potentially leading to higher revenue in the long term.
  
• The strategic location in Orissa, with integrated operations and captive resources, should help NALCO maintain operational efficiency and reduce costs, positively impacting net margins.
  
• The company's commitment to leveraging its zero-debt position for future expansions indicates a potential increase in earnings due to lower financing costs and additional capacity.
  
• Expected infrastructure and industrial growth in India could drive demand for aluminium products, suggesting a healthy revenue growth trajectory for NALCO.
  
• Investments in value-added products and downstream operations may help NALCO diversify its revenue streams and improve profitability margins given higher margins in value-added products compared to primary aluminium.

National Aluminium Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming National Aluminium's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.8% today to 22.2% in 3 years time.
• Analysts expect earnings to reach ₹40.7 billion (and earnings per share of ₹22.14) by about February 2028, down from ₹42.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹57.0 billion in earnings, and the most bearish expecting ₹30.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, up from 8.8x today. This future PE is lower than the current PE for the IN Metals and Mining industry at 21.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.35%, as per the Simply Wall St company report.

National Aluminium Future Earnings Per Share Growth

Risks

• Exposure to fluctuations in global aluminium and alumina prices could impact NALCO's future revenue projections due to the inherent volatility of commodity markets.
  
• The company's reliance on a large CapEx plan for smelter and power projects exposes it to potential financial risks and increased debt levels, potentially affecting future earnings.
  
• Any delays or cost overruns in the expansion projects, including the alumina refinery and Pottangi mines, could strain financial resources and impact net margins.
  
• The introduction of new tariffs on aluminium by key markets like the U.S. may create market uncertainties and affect global demand, potentially reducing revenues.
  
• Operational risks, such as the ability to maintain or increase production efficiency and manage input costs (e.g., caustic soda and coal), could affect the company's profit margins.

Valuation

• The analysts have a consensus price target of ₹227.9 for National Aluminium based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹275.0, and the most bearish reporting a price target of just ₹185.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹183.7 billion, earnings will come to ₹40.7 billion, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 14.3%.
  
• Given the current share price of ₹201.01, the analyst price target of ₹227.9 is 11.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.