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Nalco: Profits rise on lower cost
Jan 30, 2014

Nalco has announced its results for the quarter ended December2013. The company has reported a decrease of 2.9% YoY in net sales and an increase of 10.2% YoY in net profits respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Topline of the company decreased by 2.9% YoY due to lower sales
  • At the operating level, the company reported an increase of 11.9% YoY in operating profits due to lower costs. Operating margins also improved by 1.6% YoY.
  • Net profits increased by 10.2% YoY. Net profit margins increased by 1% YoY.
  • For the nine months ended December, 2013, net sales declined by 2.1% YoY and net profits increased by 35.5% YoY.

(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Net sales 16,928 16,439 -2.9% 50,492 49,427 -2.1%
Expenditure 15,102 14,396 -4.7% 45,640 43,178 -5.4%
Operating profit (EBDITA) 1,827 2,043 11.9% 4,852 6,248 28.8%
Operating profit margin (%) 10.8% 12.4%   9.6% 12.6%  
Other income 1,127 1,208 7.2% 3,921 4,223 7.7%
Interest (net) 2 - -100.0%  75 - -100.0%
Depreciation 1,231 1,308 6.2% 3,694 3,838 3.9%
Profit before tax 1,720 1,943 13.0% 5,005 6,634 32.5%
Exceptional Item - -   - -  
Tax 531 633 19.3% 1,537 1,936 26.0%
Profit after tax/(loss) 1,189 1,310 10.2% 3,468 4,698 35.5%
Net profit margin (%) 7.0% 8.0%   6.9% 9.5%  
No. of shares (m)         2,578  
Diluted earnings per share (Rs)         2.8  
P/E ratio (x)*         12.6  
* On a trailing 12 months basis

What has driven performance in 3QFY14?
  • Net sales of the company declined by 2.9% YoY. Its alumina production volumes increased by 17.7% YoY to 466,000 tonne whereas the aluminium production volumes declined by 21.0% YoY to 79,000 tonne.

  • Aluminium EBIT continued to remain in negative trajectory at Rs 405 m following subdued prices (out of the past 10 quarters, aluminium EBIT was negative in nine quarters). Alumina revenue improved on YoY basis, but fell on QoQ basis as there was large inventory liquidation in 2QFY14. Nalco posted a 15% YoY rise in alumina revenue at Rs 8,182 m, while it was down 15% QoQ. Alumina EBIT was up 24% YoY because of higher volume, while it was down 31% QoQ on account of lower volume. The power generation segment returned to profitability on QoQ basis, while it was down 5% on YoY basis.

  • Alumina realization was down 1% QoQ to Rs 19,382/t (USD $313/t). Metal product premium increased 0.9% QoQ to 18.5% in 3QFY14. Cost break-up

    Cost break-up
    (Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
    Raw Materials 2,642 2,409 -8.8% 8,718 7,747 -11.1%
    % of sales 16% 15%   17% 16%  
    Staff costs 2,895 3,025 4.5% 8,685 9,467 9.0%
    % of sales 17% 18%   17% 19%  
    Power & fuel 5,852 5,198 -11.2% 19,433 15,391 -20.8%
    % of sales 35% 32%   38% 31%  
    Other Expenses 3361.3 3658.8 8.9% 9536 10629 11.5%
    % of sales 20% 22%   19% 22%  

  • PAT was up 10% YoY but down 27% QoQ, imitating EBITDA performance. For 9MFY14, the company posted 29 and 35% jump in EBITDA and PAT, respectively, driven by higher alumina sales, while revenue was down 2% because of lower aluminium sales. The tax rate for the company stood at 32.5% in 2QFY14 compared to 30.9% in 3QFY13.
What to expect?
Nalco’s earnings remained extremely volatile in the past few quarters because of a sharp movement in power and fuel costs. Alumina production, the key driver of earnings, is expected to bounce back at full capacity in 4QFY14 and the cost of production to be lower, benefiting from operating leverage. Aluminum segment too is expected to turn around with stronger spot premiums and stable LME at around an average of USD $1,800/t. We believe the Indonesia bauxite supply disruption, accounting for 20-25% of global production, will drive up alumina and aluminum prices.

At the current price of Rs 35, the stock is trading at a multiple of 12.8 times its trailing twelve month earnings. We maintain our Hold view on the stock from a long term perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single large cap stock comprises more than 5% of your portfolio

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