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Nalco: Consistent performance

Jan 30, 2003

National Aluminium Company Ltd. (NALCO), the largest alumina producer and second largest producer of primary aluminum in the country, has posted impressive results for the third quarter ended December 2002. The company is a strong player in the aluminium business with fully integrated operations from mining to smelting aided by captive power. Consequently, it is amongst the lowest cost aluminium producers in the world. The company's revenues grew at an impressive rate of 16% in 3QFY03. The growth in topline can be attributed to a rise in the aluminium prices in the international market. The average aluminium price in the month of September was around US$ 1,300 per tonne, which increased to US$ 1,375 per tonne in December'02.

The company registered a bottomline growth of 16% in 3QFY03 compared to the corresponding quarter last year. On the operational front, the company has shown an increase of 13% in profits. However, operating margins fell by over 100 basis points to 38%.

(Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
Net Sales 5,543 6,437 16.1% 15,757 18,401 16.8%
Other Income 359 609 69.8% 1,041 1,407 35.2%
Expenditure 3,391 4,011 18.3% 10,136 11,214 10.6%
Operating Profit (EBDIT) 2,152 2,426 12.8% 5,621 7,187 27.9%
Operating Profit Margin (%) 38.8% 37.7%   35.7% 39.1%  
Interest 305 299 -2.2% 812 916 12.8%
Depreciation 805 888 10.3% 2,326 2,654 14.1%
Profit before Tax 1,400 1,849 32.0% 3,523 5,024 42.6%
Tax 298 572 91.8% 820 1,570 91.6%
Profit after Tax/(Loss) 1,102 1,277 15.9% 2,704 3,454 27.7%
Net profit margin (%) 19.9% 19.8%   17.2% 18.8%  
No. of Shares (m) 644.3 644.3   644.3 644.3  
Diluted Earnings per share (Rs)* 6.8 7.9   5.6 7.1  
P/E Ratio (x)   11.3     12.5  
*(annualised and before other adjsts.)            

The rise in expenditure by 18% contributed to the fall in the margins. The major cause of this rise was repairs and maintenance, which jumped by over 50%. Power and fuel expenses also showed an increase of 24% YoY. Other manufacturing and selling/distribution expenses also rose by 19% and 10% respectively. Overall, expenditure increased from 61% to 62% as a percentage of sales.

Cost break-up
(Rs m) 3QFY02 3QFY03 Change
Stock in progress 23 194 755.5%
Raw material consumed 861 851 -1.1%
Power & Fuel 1,159 1,435 23.7%
Repairs & maintenance 248 383 54.3%
Other Mfg. Expenses 160 191 19.4%
Staff costs 614 620 0.9%
Administration expenses 187 184 -1.6%
Selling & distribution exp. 139 154 10.3%
Total expenses 3,391 4,011 18.3%

The results are also good compared to the first two quarters of the current fiscal. To put things into perspective, in the first quarter, the company had posted a 36% fall in profits on a 11% rise in topline, whereas in the second quarter, the fall in bottomline was 8% (excluding extra-ordinary expense in 2QFY02) on a 25% increase in topline. It must be remembered here that in 2QFY02, the company had undertaken a revision of executive and non-executive pay scales, which created an extra-ordinary charge and hence lower profits in that quarter.

On another front, the company was able to curtail the interest outgo and reduce it by 2% in 3QFY03. This is commendable when compared to the fact that interest outgo was up 33% and 12% respectively in the first two quarters.

As mentioned in our earlier reports, with majority of revenue generated from upstream business the company's financials are susceptible to cyclicality. And realizing this fact, the company seems to be taking steps to venture downstream, which could smoothen future earnings and consequently margins. The company has commissioned a 10,000 tonnes per annum (TPA), detergent grade zeolite plant at Damanjodi, Orissa (same location of alumina refinery). Although costlier, zeolite internationally is a preferred raw material in making detergents. The company's commissioning of the 50,000 tonnes cold rolled mill will help propel value and volume growth for the company.

However, with a significant chunk of revenues still coming from the upstream business, investors are likely to witness more volatility in the stock and should be alert of trends in the commodity cycle, as shifts in aluminium prices are likely to reflect on the company's financials.

At Rs 90, the company is trading on a P/E multiple of 12.5x 9mFY03 annualised earnings. The valuations are on the higher end of the spectrum. Nalco's compatriot, Hindalco, currently trades at 9x annualised 9mFY03 earnings. The higher valuations are owing to disinvestment hopes in the next fiscal. However, seeing the government's track record, investors must remain cautious of any adverse developments on the divestment front. Moreover, currently, the aluminium prices are ruling strong over $1,400 per tonne. Adverse developments on the US-Iraq war front could send the prices spiraling down as the growth in the US and European economies will be severely affected.

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