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Nalco: The lustre is intact! - Views on News from Equitymaster
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Nalco: The lustre is intact!
Jan 25, 2007

Performance summary
Nalco, the leading alumina and aluminium player in the country, announced results for the quarter ending December 2006. The company reported a decent topline growth of 9% YoY while a robust bottomline growth of 46% YoY, due mainly to an 810 basis points expansion in operating margins and higher other income. The expansion in operating margins is the result of efficient utilization of available resources (operating expenses declined by 9% YoY) and continued strength being witnessed in the aluminium industry.

Financial performance snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 13,249 14,486 9.3% 33,506 43,757 30.6%
Expenditure 6,604 6,037 -8.6% 17,377 17,213 -0.9%
Operating profit (EBITDA) 6,645 8,449 27.2% 16,129 26,544 64.6%
EBITDA margin 50.2% 58.3%   48.1% 60.7%  
Other income 545 978 79.7% 1,424 2,827 98.4%
Depreciation 919 744 -19.0% 2,893 2,302 -20.4%
Profit before tax/(loss) 6,271 8,684 38.5% 14,660 27,068 84.6%
Tax 2,341 2,958 26.4% 5,094 9,169 80.0%
Profit after tax/(loss) 3,930 5,726 45.7% 9,566 17,899 87.1%
Net margin 29.7% 39.5%   28.6% 40.9%  
No of shares (m) 644.31 644.31   644.31 644.31  
Diluted EPS (Rs)*         37.2  
P/E (times)         6.2  
*trailing twelve month earnings            

What is company’s business?
Nalco is the largest alumina and second largest aluminium producer in India. Nalco is Asia's largest integrated aluminium complex, encompassing bauxite mining, alumina refining, aluminium smelting and casting, power generation, rail and port operations. The company is amongst the lowest cost producers of the base metal in the world. It has a competitive edge vis-ŕ-vis its peers due to factors like rich bauxite reserves, captive power plants and rail and port operations. The company derives more than 50% of its revenues from exports. The company does not incur interest cost as it being a zero debt company.

What has driven performance in 3QFY07?
Improved efficiency and better realisations: Nalco reported a decent topline growth of 9% YoY on the back of strong demand for the metal that led to better realisations. While it does not declare volume sales numbers, considering that the aluminium production growth during the quarter was a tad lower compared to the corresponding quarter of the previous fiscal, this could be taken as an indication of flat growth in sales volume during the quarter. Though aluminum prices were higher by almost 31% YoY, alumina witnessed a sharp fall of almost 50% YoY. Exports contributed to the extent of 50% of revenues, which has further fuelled growth. Thus, it could be safe to assume that during the quarter, the growth has been mainly achieved on account of better realizations from aluminium business.

Margins sustained: The operating margins of the company have expanded by almost 810 basis points (8.1%) compared to corresponding quarter last year on the back of strong realization and increasing demand for aluminium.

Most of the cost heads have reduced as a percentage of sales during 3QFY07 as compared to corresponding quarter last year. Setting up of captive power plants has helped company reduce costs on a YoY basis.

Cost break-up (% of Sales) 3QFY06 3QFY07
Consumption of raw material 14.6% 10.3%
Staff cost 6.4% 5.9%
Power and fuel 17.7% 14.4%
Other expenditure 9.2% 11.1%
Total Cost 47.8% 41.7%

The net profit margins have expanded by 980 basis points (9.8%). Apart from superior operating performance, a robust 80% YoY growth in other income has also boosted net margins.

Over the few quarters: While the margins have dropped if one considers the sequential trend, on a YoY basis, there has been a significant expansion in the same. The bottomline growth has been achieved mainly on account of higher prices and increase in other income over the quarters. Reduction in costs is reflected at the operating level, however in this quarter, poor realisations by the alumina segment led to lower EBITDA margins compared to the recent past.

Particulars 3Q06 4Q06 1Q07 2Q07 3Q07
Net Sales growth (YoY, %) 21.5% 24.6% 51.8% 37.7% 9.3%
Net profit margin (%) 29.7% 39.5% 41.9% 41.3% 39.5%
EBITDA margin (%) 50.2% 63.1% 62.9% 60.7% 58.3%

What to expect?
At the current price of Rs 231, the stock is trading at a price to earnings multiple of 6.2 times its trailing twelve month earnings. At the current juncture, we do foresee aluminium prices to remain strong in medium term. However, further volume growth, will be achieved by the company once next phase of expansion is complete. Growing demand and favourable demand supply equation are viewed as positive for a company in the aluminium business. However, Nalco needs to come up with the planned capacity as per schedule to benefit from the same. We remain positive on the prospects of the company, as the outlook for the business remains positive in the medium-term.

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