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Nalco: Quite a bounce back - Views on News from Equitymaster

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Nalco: Quite a bounce back
Jan 31, 2013

National Aluminium Company Limited (Nalco) has announced its results for the quarter ended December 2012. The company has reported an increase of 16.7% YoY in net sales and 132.2% YoY in net profits respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Topline of the company increased by 16.7% YoY.
  • At the operating level, the company reported 166.9% YoY increase in operating profits. Operating margins of the company improved by 6.1% YoY.
  • Net profits increased by a staggering 132.2% YoY. Net profit margins increased by 3.5% YoY.
  • For the nine months ended December 2012, the company has reported an increase of 4.6% YoY in net sales and a decline of 38.9% YoY in net profits respectively.

Financial performance: A snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 14,509 16,928 16.7% 48,271 50,492 4.6%
Expenditure 13,824 15,102 9.2% 39,888 45,640 14.4%
Operating profit (EBDITA) 684 1,827 166.9% 8,382 4,852 -42.1%
Operating profit margin (%) 4.7% 10.8%   17.4% 9.6%  
Other income 1,262 1,127 -10.7% 3,828 3,921 2.4%
Interest (net) 1 2 90.9% 1 75 6672.7%
Depreciation 1,235 1,231 -0.3% 3,434 3,694 7.6%
Profit before tax 710 1,720 142.3% 8,775 5,005 -43.0%
Exceptional Item - -   858 -  
Tax 198 531 168.4% 2,243 1,537 -31.5%
Profit after tax/(loss) 512 1,189 132.2% 5,674 3,468 -38.9%
Net profit margin (%) 3.5% 7.0%   11.8% 6.9%  
No. of shares (m)         2,578  
Diluted earnings per share (Rs)         2.4  
P/E ratio (x)*         20.5  
* On a trailing 12 months basis

What has driven performance in 3QFY13?
  • Net sales of the company increased by 16.7% YoY. Nalco posted 16% YoY and 9% QoQ increase in alumina revenue, primarily driven by higher volume. Aluminium revenue posted a 13% YoY jump on the back of marginal improvement in volume, realisation and the metal's premium over London Metal Exchange (LME). Power revenue was up 5% YoY as well QoQ due to stable generation.

  • Nalco posted a 7% YoY jump in aluminium production due to higher capacity utilisation, while it was down 2% QoQ. However, alumina performance remained strong with 35% YoY and 14% QoQ jump in sales volume due to commissioning of a new unit.

  • The company's aluminium segment reported a lower EBIT loss of Rs 215 m for the quarter compared to a loss of Rs 1529 m in 3QFY12, which helped in improvement in the performance. Power costs as a percentage of net sales stood at 35.0%, compared to 39.7% in 3QFY12 as there was significant improvement in supply of linkage coal from Mahanadi Coalfields (80% of the coal mix). Further, staff costs decreased 2.4% YoY to Rs 2895 m. Hence, Nalco reported an EBITDA growth of 166.6% YoY. Nalco's aluminium EBIT continues to make losses on account of lower realizations coupled with higher costs.

    Cost break-up
    (Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Raw Materials 2,652 2,642 -0.4% 7,824 8,718 11.4%
    % of sales 18% 16%   16% 17%  
    Staff costs 2,965 2,895 -2.4% 7,790 8,685 11.5%
    % of sales 20% 17%   16% 17%  
    Power & fuel 5,683 5,852 3.0% 16,878 19,433 15.1%
    % of sales 39% 35%   35% 38%  
    Other Expenses 2781 3361.3 20.9% 8317 9536 14.7%
    % of sales 19% 20%   17% 19%  

  • Nalco reported a jump of 132.2% YoY in net profit. Other income declined by 10.5% YoY to Rs 1127 m and tax rate also increased to 30.9% compared to 27.9% in 3QFY12. Net profit margins improved from 3.5% in 3QFY12 to 7% in 3QFY13.

What to expect?
Nalco has been facing coal supply issues, which has disrupted operations in the past few quarters. The company sources its annual coal requirement from Mahanadi Coalfields Ltd, but the supply is not evenly distributed. In our view, any disturbance in coal supply would increase the company's dependence on imported or external coal (which is very expensive compared to linkage coal), thereby negatively affecting its margins.

At the current price of Rs 50, the stock is trading at a multiple of 20.5 times its trailing twelve month earnings. We maintain our BUYview on the stock from a long term perspective.

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