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Nalco: Coal prices take a heavy toll
Jan 28, 2010

Performance summary
  • Topline grows by 37% YoY during 3QFY10.
  • EBITDA margin contracts to 21% during 3QFY10, down from 26% in 3QFY09 due to higher raw material cost (as a percentage of sales).
  • Other income declines by 46% YoY.
  • Bottomline registers a decline of 29% YoY during 3QFY10 due to lower margins and a higher tax outgo.


Financial snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 10,360 14,176 36.8% 41,051 35,320 -14.0%
Expenditure 7,704 11,215 45.6% 23,967 29,269 22.1%
Operating profit (EBDITA) 2,655 2,961 11.5% 17,084 6,052 -64.6%
EBDITA margin (%) 25.6% 20.9%   41.6% 17.1%  
Other income 1,133 617 -45.5% 2,923 3,031 3.7%
Interest 6 1 -75.0% 10 21 103.9%
Depreciation 642 789 22.9% 2,017 2,310 14.5%
Profit before tax 3,140 2,787 -11.2% 17,980 6,752 -62.4%
Tax 946 1,236 30.7% 6,087 2,341 -61.5%
Profit after tax/(loss) 2,195 1,552 -29.3% 11,893 4,411 -62.9%
Net profit margin (%) 21.2% 10.9%   29.0% 12.5%  
No. of shares (m)         644  
Diluted earnings per share (Rs) *         8  
Price to earnings ratio (x) *         47.2  
* On a trailing 12 months basis

What has driven performance in 3QFY10?
  • Nalco reported a topline growth of 37% YoY during 3QFY10. This was mainly on account of higher London Metal Exchange (LME) prices.

  • The company’s operating margin declined to 21% during 3QFY10, down from 26% in 3QFY09 due to higher raw material cost (as a percentage of sales). The cost of coal has increased steeply.

    Cost break-up
    (Rs m) 3QFY09 3QFY10 Change
    Raw materials 398 2,586 549.7%
    % sales 3.8% 18.2%  
    Power and fuel 3,639 4,401 20.9%
    % sales 35.1% 31.0%  
    Staff cost 1,827 2,067 13.1%
    % sales 17.6% 14.6%  
    Other expenditure 1,840 2,161 17.5%
    % sales 17.8% 15.2%  
    Total cost 7,704 11,215 45.6%
    % sales 74.4% 79.1%  

  • During 3QFY10, Nalco’s other income declined by 46% YoY. At the bottomline level, the company registered a decline of 29% YoY during 3QFY10 due to lower margins and a higher tax outgo.

What to expect?
Global aluminium demand increased 13% YoY in 3QFY10 due to the sharp rise in Chinese demand and the low base effect. Consumption in most other regions is also improving after the severe crash seen during the economic downturn. At the end of December 2009, LME stocks were 4.6 m tons. We expect demand to be strong on the back of construction, electrical and transportation sectors.

At the current price of Rs 384 per share, Nalco is trading at 2 times our expected FY11 book value per share. At this juncture prices fully reflect the underlying asset value leaving little room for a bargain for investors.

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