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Nalco: Lower costs aid margins
Feb 1, 2011

Nalco has announced its 3QFY11 results. The company has reported a 3% YoY and 65% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline grows by a marginal 2.8% YoY during the quarter ended December 2010.
  • Operating profits increases by 40.2% YoY during the quarter. This was led by lower operating costs coupled with higher realizations. Thus EBITDA margins improve by 7% during the quarter to 26.1%.
  • Net profits grow by 64.9% YoY. Growth was higher than operating profits mainly on account of higher other income and a lower effective tax rate.
  • Bottomline in 9mFY11 grows by 73.2% YoY on the back of a 20.9% YoY growth in topline.

Financial performance snapshot
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 13,865 14,250 2.8% 34,511 41,715 20.9%
Expenditure 11,215 10,536 -6.1% 29,269 30,993 5.9%
Operating profit (EBITDA) 2,649 3,715 40.2% 5,243 10,722 104.5%
EBITDA margin 19.1% 26.1%   15.2% 25.7%  
Other income 929 1075 15.7% 3840 3,234 -15.8%
Interest 1 1 -42.9% 21 1 -97.6%
Depreciation 789 1,030 30.5% 2,310 2,898 25.5%
Profit before tax/(loss) 2,787 3,759 34.8% 6,752 11,057 63.8%
Tax 1236 1199 -3.0% 2340.7 3,417 46.0%
Profit after tax/(loss) 1,552 2,560 64.9% 4,411 7,640 73.2%
Net margin 11.2% 18.0%   12.8% 18.3%  
No of shares (m)         644.3  
Diluted EPS (Rs)*         17.9  
P/E ratio (x)*         22.5  
* On a trailing 12 months basis

What has driven performance in 3QFY11?
  • Nalco reported a topline growth of 2.8% YoY during the quarter. The lower growth was due to a marginal 1.5% YoY sales growth of the aluminium business. On the other hand, chemical and electricity business registered a decline in sales by 3.5%YoY and 28.5% YoY respectively.

  • The company's operating margin expanded to 26.1% during 3QFY11, up 700 basis points from 19.1% in 3QFY10 due to lower other expenditure (as a percentage of sales).

    Cost break-up
    (Rs m) 3QFY10 3QFY11 Change
    Raw materials 2,089 2,075 -0.7%
    % sales 15.1% 14.6%  
    Power and fuel 4,401 4,436 0.8%
    % sales 31.7% 31.1%  
    Staff cost 2,067 2,310 11.7%
    % sales 14.9% 16.2%  
    Other expenditure 2,658 1,715 -35.5%
    % sales 19.2% 12.0%  
    Total cost 11,215 10,536 -6.1%
    % sales 80.9% 73.9%  

  • During 3QFY11, Nalco's other income increased by 15.7%. Also, the effective tax rate during the quarter was lower by over 12% YoY. Hence, at the bottomline level, the company registered a growth of 64.9% YoY for the quarter and 73.2% YoY for 9mFY11.

  • The company declared an interim dividend of Rs 2 per share for FY11.

What to expect?
At the current price of Rs 402 per share, Nalco is trading at 2.2 times our expected FY13 book value per share. (ResearchPro subscribers can view our updates here). At this juncture prices fully reflect the underlying asset value leaving little room for margin for investors

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