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Nalco: Poor form continues - Views on News from Equitymaster
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Nalco: Poor form continues
Jan 29, 2008

Performance summary
  • Topline falls by 23% YoY during 3QFY08, seemingly hurt by rising rupee and falling alumina prices.

  • A huge 19% drop in operating margins leads to 48% YoY fall in operating profits.

  • PAT shrinks 43% YoY, slightly lower than the drop in operating profits, largely due to 41% growth in other income and 11% fall in depreciation charges

  • For the nine month period, the company’s topline has fallen 18% YoY while the bottomline has registered an even bigger decline of 32% YoY.

(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 14,486 11,093 -23.4% 43,757 35,827 -18.1%
Expenditure 6,037 6,693 10.9% 17,213 19,578 13.7%
Operating profit (EBDITA) 8,449 4,401 -47.9% 26,544 16,249 -38.8%
EBDITA margin (%) 58.3% 39.7%   60.7% 45.4%  
Other income 978 1,380 41.0% 2,827 4,333 53.3%
Interest (net) - -   - 7  
Depreciation 744 662 -11.0% 2,302 2,037 -11.5%
Profit before tax 8,684 5,118 -41.1% 27,068 18,539 -31.5%
Tax 2,958 1,824 -38.3% 9,169 6,381 -30.4%
Profit after tax/(loss) 5,726 3,294 -42.5% 17,899 12,158 -32.1%
Net profit margin (%) 39.5% 29.7%   40.9% 33.9%  
No. of shares (m) 644.3 644.3   644.3 644.3  
Diluted earnings per share (Rs)*         28.0  
Price to earnings ratio (x)**         13.4  
(* annualised, ** on trailing twelve months earnings)

What has driven performance in 3QFY08?
The company has continued to face pressure on alumina realisations during the quarter under consideration. Further, given the fact that the company derives a significant portion of its revenues from exports, the fall in dollar against the rupee has also not helped matters. While the company does sell most of its aluminium in the domestic markets, it has met with poor realisations here too, thus providing no respite of any kind to the topline growth. Consequently, the topline has shrunk 23% YoY during the quarter.

cost break up...
(Rs m) 3QFY07 3QFY08 Change
Raw materials 1,489 1,195 -19.7%
% sales 10.3% 10.8%  
Power and fuel 2,081 2,505 20.4%
% sales 14.4% 22.6%  
Staff cost 858 1,265 47.4%
% sales 5.9% 11.4%  
Other expenditure 1,609 1,726 7.3%
% sales 11.1% 15.6%  

Operating profits have witnessed a steep decline of 48% as compared to same quarter last year. Such a huge fall leads us to believe that damage to the company’s topline has been more realisations driven than volumes driven. While raw material expenses have fallen on a YoY basis, a huge jump in staff costs as also power and fuel expenses have caused maximum damage to the margins during the quarter.

Fall in bottomline at 43% YoY has come in slightly lower than operating profits. This could be attributed to a significant 41% jump in other income and an 11% fall in depreciation charges.

What to expect?
At the current price of Rs 425, the stock is trading at a multiple of 2.5 times its FY10 book value, which we believe is on the higher side.

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