Financials/Valu FY15 FY16 FY17 FY18E FY19E. 1Mn 3Mn 1Yr P/B (X) Absolute P/E (x)

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1 18-Dec-17 INDUSTRY - METALS BLOOMBERG - NACL IN BSE Code NSE Code - NATIONALUM NIFTY Company Data CMP 78 Target Price Previous Target Price 52wk Range H/L Mkt Capital (Rs Cr) Av. Volume (,000) Key Highlights of the Report: Continuous uptrend in Alumina Prices (high of USD 468/ton in October 2017) have increased the revenue visibility of company though prices saw some correction in November end and December beginning of 2017 but we are positive that it would moderate and remain healthy. Financials/Valu FY15 FY16 FY17 FY18E FY19E Net ation Sales 7,383 6,817 7,543 9,218 9,561 Shareholding patterns % EBITDA 1, ,080 1,503 1,910 2QFY18 1QFY18 4QFY17 EBIT 1, ,354 Promoters PAT 1, ,122 FII EPS (Rs) DII EPS growth (%) 106% -40% 13% 38% 22% Others ROE (%) 10% 6% 7% 9% 10% Total ROCE (%) 10% 4% 6% 9% 12% Stock Performance % BV Mn 3Mn 1Yr P/B (X) Absolute P/E (x) Rel.to Nifty NATIONALUM NIFTY Positive Signs With some moderation in November 2017 Alumina prices have been on an 140 uptrend since May 2017 led by capacity closure in China (Environmental & Supply Side Reforms) & are expected to remain healthy for near future. 130 Scope of growth has improved with better prices coupled with strong 120 fundamentals of the company. DEEPAK KUMAR Deepak.kumar@narnolia.com SAGAR SHARMA 90 Upside 16% Currently trading at 13x FY19e EPS P/B 98/55 15, Low CoP of Alumina works out well as company can earn better premium on Alumina and low cost of raw material for Aluminium business as compared to other players. Company s earnings would have been better but were partially offset by increase in Power & Fuel (Increase in electricity duty in Odisha) and higher employee cost (due to pay revision provision). Mgmt. guidance of 6-7 lk ton of Alumina sales and 2 lk ton of Aluminium in the second half of FY18. We Value the stock at Rs 90 (1.6x FY19e Book Value) and recommend BUY. Capex plan to set up 1 MTPY stream in existing Alumina refinery at a capex of Rs.5540 crore further helps the company to strengthen its Alumina business. Grant of mining lease of Pottangi mines with 75 mt Bauxite reserve and allotment of Utkal D & E Coal blocks makes us positive on company with a long term perspective. Company's Export oriented (i.e Middle East) sales model for Alumina also makes it more attractive as it earns better premium in export sales and demand is expected to be healthy in Middle East going ahead.

2 Quarterly Performance Financials 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 YoY % QoQ% FY16 FY17 YoY % Net Sales 1,738 1,852 2,423 1,803 2, % 36% 6,817 7,543 11% Other Income % -6% % Total Income 1,875 1,928 2,485 1,889 2,536 35% 34% 7,422 7,951 7% COGS % 480% 1,095 1,085-1% Power & Fuel % 16% 1,865 2,213 19% Employee Cost % 5% 1,398 1,537 10% Other Expenses % 3% 1,499 1,628 9% Expenditure 1,566 1,567 1,996 1,575 2,119 35% 35% 5,858 6,463 10% EBITDA % 47% 959 1,080 13% Depreciation % -4% % EBIT % 102% % Interest % 0% % PBT % 55% 1,135 1,005-11% Exceptional Item (16) (53) % Tax % 27% % PAT % 82% % Total Comp. Inc % 75% % Margin % Gross Margin % 82% 88% 81% 95% 80% -2% -16% 84% 86% 2% EBITDA Margin % 10% 15% 18% 13% 14% 38% 8% 14% 14% 2% EBIT Margin % 2% 9% 13% 6% 9% 327% 48% 8% 8% 2% PAT Margin % 7% 8% 11% 7% 9% 38% 28% 12% 9% -23% Expenses as % of Sales COGS 18% 12% 19% 5% 18% 0% 288% 16% 14% -10% Power & Fuel 30% 32% 24% 34% 29% -4% -15% 27% 29% 7% Employee Expense 20% 19% 20% 24% 18% -9% -23% 21% 20% -1% Other expenses 21% 21% 19% 24% 18% -12% -24% 22% 22% -2% Expenditure 90% 85% 82% 87% 86% -4% -1% 86% 86% 0% Result Update 2Q FY18 Company s EBITDA increased by 95% YoY & 47% QoQ on back of better realization & higher volume of Alumina and Aluminium YoY. PAT Increased to Rs.229 crore up 94% YoY & 75% QoQ. Increase in Power & Fuel cost (Up 36% YoY at 717 crore) due to increase in electricity duty in Odisha & higher Coal Cost. Employee cost increased (up 29% YoY at Rs.453 crore) because of pay revision of employees amounting to Rs crore. Exceptional income of Rs crore on the account of reversal of Rs crore provision for DMF & provision of Rs.3.11 crore provided for interest payable on Entry tax.

3 Alumina production volume for the quarter stood at up 16% YoY & down 3% QoQ. Sales volume of Alumina stood at up 31% YoY and 47% QoQ because of destocking. Aluminium production volumes were at up 17% YoY and 4% QoQ. Sales volume was up 14% YoY & 27% QoQ because of destocking. Alumina Production and Sales Volume in (000'MT) Alumina Production Alumina Sales Aluminium Production and Sales Volume in (000'MT) Aluminium Production Aluminium Sales

4 About Company NALCO is one of the largest integrated Bauxite-Alumina-Aluminium- Power Complex in the Country. The Company has a lakh TPA Bauxite Mine &21.00 lakh TPA(normative capacity) Alumina Refinery located at Damanjodi in Koraput dist. of Odisha, and 4.60 lakh TPA Aluminium Smelter & 1200MW Captive Power Plant located at Angul, Odisha. NALCO has bulk shipment facilities at Vizag port for export of Alumina/Aluminium and import of caustic soda and also utilizes the facilities at Kolkata and Paradeep ports. Bauxite Mines A fully mechanized open cast mine with a present capacity of Lakh TPA is in operation since 1985, in the Panchpatmali hills of Koraput district in Odisha. The deposit runs 17 Km in length in a NNE-SSW direction. Initial reserve was estimated at 310 million tonne having high grade low silicia content suitable for low pressure energy efficient process for refining. Company has been granted lease of Pottangi mines with 75 Million tonne bauxite reserve in Odisha's Koraput district for a period of 50 years. Features- Area of Deposit- 16 sq. KM, Resource-310 million tonnes, Ore quality- Alumina 45%, silicia 3%, over 90% gibbisitic, Over burden- 3 meters (average), ore thickness- 14 meters (average), Transport KM long, single flight, multi-curve belt conveyor of 1800 TPH capacity. Alumina Refinery Located at Damanjodi in Koraput district in Odisha, Company has 3 production streams, each of 5.25 lakh TPY and 4th stream of 7 lakh TPY. And company is planning to set up 5th stream adjacent exisiting 4 stream which would take the total capacity to TPY and it is expected to get fully commissioned by FY21. Refinery is located approximately 14 KM from the bauxite mine at Panchpatmali. The mined-out bauxite is transported from captive mine to refinery by a 14.6 KM long single-light multi-curve 1800 tonnes per hour (TPH) capacity cable belt conveyor. The alumina produced is transported to aluminium smelter at Angul (Odisha) and to Vizag (Andhra Pradesh) port by rail. Features: Atmospheric pressure digestion process, Pre-desilication and inter-stage cooling for higher productivity, Energy efficient fluidised bed calciners, Co-generation of 4x18.5 MW power by use of back pressure turbine in steam generation plant. Aluminium Smelter The present capacity of smelter is 4.60 lakh TPA. Alumina is converted into primary aluminium through a smelting process by using electrolytic reduction. From the pot-line, the molten aluminium is routed to either the casting units, where the aluminium can be cast into ingots, sow ingots, tee ingots, billets, wire rods, cast strips and alloy ingots, or to RPU where the molten aluminium is rolled into various cold-rolled products or cast into aluminium strips. Aluminium products are sold in the domestic market and also exported through Kolkata, Paradeep & Vizag ports. Nalco acquired and subsequent merged International Aluminium Products Limited (IAPL), the 50,000 tpa export-oriented Rolled Products Unit with Nalco. The RPU is integrated with the Smelter Plant at Angul for production of aluminium cold rolled sheets and coils from continuous caster route based on the advanced technology of FATA Hunter, Italy. It has also started production of another variety of rolled product named as chequered sheet with thickness ranging from 0.60mm to 3.0mm.

5 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Features-180 KA cell technology, 4 x 35 Tonne and 4 x 45 Tonne furnaces and 2 x 15 TPH and 2 x 20 TPH ingot casting machines,4 x 45 Tonne furnaces and 2 x 9.5 TPH wire rod mills, 2 x 45 Tonne furnaces and 60/42 per drop billet casting machine, 2 x 1.5 Tonne induction furnace with a 4 TPH alloy ingot casting machine, 26,000 TPA strip casting machines, 2 x 45 Tonne furnaces and 9 TPH tee ingot casting machine,2 x 45 Tonne furnaces and 20 TPH sow ingot casting facility are being installed. Captive Power Plant The Captive Power Plant has an electric power generation capacity of 1200 MW by way of ten turbogenerators, each rated at 120 MW. The Captive Power Plant meets the entire electric power requirement of Aluminum Smelter plant. It also provides approximately 35% of the electricity power requirement of Alumina Refinery plant besides supplying the surplus power to State grid. Investment Arguments Alumina Key Driver Nalco is more dependent on Alumina rather than Aluminium & being dependent on Alumina works out well for Nalco because of low cost of production as compared to other players on the back of good quality of Bauxite availability from captive mines in Panchpatmali, Koraput, Odisha with annual capacity of 6.25 Lk TPA & reserve of 310 Million Tonne & close proximity to Alumina refineries located in Damanodi in Koraput district in Odisha 14 K.M from Bauxite mine & mined bauxite is transported through a 14.6 K.M long conveyor belt. Healthy Alumina prices due to capacity closures in China because of environmental concerns and supply side reforms & positive sentiments of the prices to remain firm with some moderation in near future has also played out in favor of the company. In recent times (i.e. Sep-17, Oct-17) price movement in Alumina has been significantly more as compared to Aluminium with Alumina prices increasing by 23% & 20% whereas prices of Aluminium were almost flat with 1% increase in Sep-17 & Oct-17. Though Alumina and Aluminium prices in November fell on the back of less than expected production cuts in China and fall in spot price of Alumina and Alumina in China but we are positive about prices remaining healthy going ahead with some correction Alumina Prices(USD/ton)

6 Installation of 5th Stream of Alumina Refinery Company s capex program for setting up 5th stream in its existing Alumina refinery which shall ass 1.0 MTPY to its existing capacity of MTPY at a capex of Rs.5540 Crore which is further aided by grant of mining lease of Pottangi mines with 75 mt Bauxite reserve. As Alumina business is the key driver of Nalco s profitability both refinery expansion & grant of mining lease plays out well for the company. Utkal D & E Coal Blocks Utkal D & E Coal Blocks (200 Million tons) have been allotted by Govt. of India in favor of Nalco. Terms of reference (TOR) have been issued by Ministry of Environment, Forest & Climate Change against environmental clearance application for the coal blocks. Company is in the process of transfer of land & other statutory clearances & mining plans for the blocks has been submitted to MOC for approval. Commencement of Coal supply form these mines would substantially bring down the Coal cost as company would no longer has to depend on Coal linkages & E-Auction Coal or import of Coal. In situation such as now when Coal supply from Coal India is impacted (Due to increase supplies to power plants because of critically low inventories of Coal in power plant) company would not be impacted by Coal shortage. Further, better Coal availability would leasd to improvement in Aluminium smelter utilization & drive down CoP of Aluminium & company would be in a better position to drive more profit out of increasing LME Aluminium prices. Alumina Export Sales Nalco s 95% of Alumina sales comes from export market (i.e. Middle East). Export sale yields better premium & because of increase in Aluminium production Middle East Countries demand for Alumina has been robust & is expected to be that way going ahead as well. Middle East region accounts to close to 10% of total global Aluminium production, due to surge in infrastructure development & supporting tariffs by the Govt. of these regions such as Energy is readily available resource, modern installations, continued growth in global demand, strong export capacity etc. are expected to further keep the Aluminium production growth healthy which would lead to healthy Alumina demand. Proximity to Ports Aids Export Sales Company s Alumina refinery located in Damanjodi (Which is connected to Bauxite mine via a 14.6 K.M conveyor belt to source Bauxite)is strategically located close to Vizag port also helps the company to make the best out of its export business of Alumina b cutting down on logistic cost. Strong Fundamentals Nalco has no as such debt in its book export for short term borrowing of Rs.51 crore in FY17 (Customer bill discounted with banks which is due to INDAS adjustments) where as, other major players in the segment have significant amount of debt on their books. Nalco also has a track record of maintaining high cash balances though it reduced to Rs.2287 crore in FY17 from Rs.5103 crore in FY16 on account of buyback of shares except that company has strong fundamentals which sets it apart from other players.

7 Key Risk Volatility in Alumina & Aluminium prices : Nalco s Profitability depends on the prices of Alumina Aluminium. Currently both Alumina & Aluminium prices are on increasing trend on the back of capacity closures in China and are expected to remain firm but fall in prices would put pressure on company s profitability (low realization due to low prices & high fixed cost). Availability of Coal: Recently company had to shut down three units of company s captive power plant because of less than required coal supply & company had to import power from state grid to keep its smelters running(media Report). Non availability of coal put pressure on the margins of the company & would be a major cause of concern. Slowdown in demand of Alumina from Middle East Countries would hamper company s business as more than 90% of Alumina comes from export market and also earns good premium over other markets. Improving Financials We expect companies revenue to grow by 22% to Rs.9218 crore in FY18 & by 4% in FY19 on the back of firm Alumina and Aluminium prices and increase in Aluminium sales volume & we further expect company s EBITDA margin to improve to 16.3% in FY18 & to 20% in FY19 from 14.5 % in FY17 on the back of better realization & operating leverage coming into play in FY19. And, on the back of better topline growth & better margins we expect PAT to grow by 38% in FY18 & by 22% in FY19. Revenue (Rs.Cr) EBITDA EBITDA Margin 12,000 10,000 8,000 6,000 4,000 2,000-2,500 2,000 1,500 1, % 20.0% 15.0% 10.0% 5.0% 0.0% Net Profit (Rs.Cr) NPM 1,400 1,200 1, % 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

8 Return Ratios to Improve Return ratios are expected to improve going ahead with improvement in profitability. Return on Equity would be increasing to 9% in FY18 and further to 10% in FY19 from 7% in FY17 and Return on Capital Employed increasing to 9% in FY18 and to 12% in FY19, company is expected to efficiently utilize its capital employed and generate good returns. ROE ROCE 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% View & Valuation Alumina being the key driver, NALCO is expected to post good set of numbers on the back of uptrend in Alumina price from USD 316/ton in August 2017 to USD 468/ton in October 2017 though prices saw some correction in November 2017 on the back of less than expected production cuts in China and fall in spot Alumina and Aluminium prices in China. However, we do not expect current fall in spot prices to hurt company s earning and expect prices to moderate and normalize going ahead with Management also being positive on Alumina prices to remain firm and healthy. Capex plan to add a new stream of 1 MTPY in existing Alumina refinery to cater to increasing demand of Alumina led by increase in Aluminium production would further help company to strengthen its position in Alumina and drive more profit out of it, and it is further aided by grant of mining lease of Pottangi mines with 75 mt Bauxite reserves. Expected Commissioning of Coal production from Utkal D & E blocks which were allotted to company would cut down power & fuel cost & would be a key trigger turning the Aluminium business in to a profitable one. We are positive on the stock with a long term perspective because of its integrated Bauxite-Alumina- Aluminium-Power Structure & low Alumina Cost of Production with more than 90% of sales in Alumina coming in from export market, strong fundamental position on the back of negligible debt and steady cash flow & positive sentiments regarding Alumina prices remaining healthy even with current correction for near future. We Value the stock at Rs 90 (1.6x FY19e Book Value) and recommend BUY.

9 Financials Snap Shot Income Statement Rs in Crores Key Ratios Y/E March FY16 FY17E FY18E FY19E Y/E March FY16 FY17E FY18E FY19E Revenue from Operation 6,817 7,543 9,218 9,561 ROE 6% 7% 9% 10% Change (%) -8% 11% 22% 4% ROCE 4% 6% 9% 12% Other Income Asset Turnover EBITDA 959 1,080 1,503 1,910 Debtor Days Change (%) -44% 13% 39% 27% Inv Days Margin (%) 14% 14% 16% 20% Payable Days Depr & Amor Int Coverage EBIT ,354 P/E Int. & other fin. Cost Price / Book Value EBT 1,135 1,005 1,362 1,706 EV/EBITDA Exp Item (53) Tax Assumptions Minority Int & P/L share of Ass. 0 (1) - - FY16 FY17E FY18E FY19E Reported PAT ,122 Production (MT) Total Comp. Inc ,122 Alumina Hydrate ('000 MT) 1,953 2,100 2,100 2,100 Change (%) (0) (0) 0 0 Aluminium ('000 MT) Margin(%) 12% 9% 10% 12% Sales (MT) Alumina Hydrate ('000 MT) 1,220 1,295 1,239 1,260 Aluminium ('000 MT) Balance Sheet Rs in Crores Cash Flow Statement Rs in Crores Y/E March FY16 FY17E FY18E FY19E Y/E March FY16 FY17E FY18E FY19E Share Capital 1, PBT ,362 1,706 Reserves 11,906 9,239 9,525 9,873 (inc)/dec in Working Capital (23) (32) Networth 13,195 10,205 10,491 10,840 Non Cash Op Exp (470) (291) - - Debt Int Paid (+) Other Non Cur Liab Tax Paid (360) (218) (440) (583) Total Capital Employed 13,195 10,256 10,491 10,840 others Net Fixed Assets (incl CWIP) 7,283 7,710 8,353 8,798 CF from Op. Activities 881 1,436 1,406 1,646 Non Cur Investments (inc)/dec in FA & CWIP (594) (762) (1,150) (1,000) Other Non Cur Asst 1,023 1,005 1,005 1,005 Free Cashflow Non Curr Assets 9,367 8,845 9,488 9,933 (Pur)/Sale of Inv (594) (762) (1,150) (1,000) Inventory 1,055 1,156 1,413 1,465 others Debtors CF from Inv. Activities 314 1,550 (1,150) (1,000) Cash & Bank 5,103 2,287 1,856 1,728 inc/(dec) in NW - (2,835) - - Other Curr Assets inc/(dec) in Debt - 51 (51) - Curr Assets 7,344 5,656 5,659 5,674 Int. Paid (1) (0) - - Creditors Div Paid (inc tax) (543) (826) (636) (774) Provisons (both) others Other Curr Liab 853 1,170 1,430 1,483 CF from Fin. Activities (544) (3,616) (687) (774) Curr Liabilities 1,982 2,601 3,011 3,123 Inc(Dec) in Cash 651 (630) (431) (128) Net Curr Assets 5,362 3,055 2,647 2,551 Add: Opening Balance ,287 1,856 Total Assets 16,710 14,501 15,147 15,607 Closing Balance ,856 1,728

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