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NALCO: Profits decline on lower LME prices - Views on News from Equitymaster

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NALCO: Profits decline on lower LME prices
Feb 9, 2012

Nalco has announced its results for the quarter ended December 2011. The company has reported a rise of 0.4% YoY in net sales and 80% YoY decline in net profits respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Topline grows marginally by 0.4% YoY during the quarter ended December 2011 on account of lower LME aluminium prices.
  • Operating profits declined by 83.6% YoY during the quarter owing to higher expenditure. EBITDA margins declined by 22.6% YoY.
  • Net profits decreased by 80% YoY on account of higher depreciation and high raw material cost. Net profit margins declined by 14.2% YoY.
  • Other income grew by 46.4% YoY during the quarter ended December 2011.
  • For the nine months ended December 2011, net sales increased by 14.1% and net profit declined by 23.1% as compared to the same quarter previous year.


Financial performance snapshot
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Sales 14431 14486 0.4% 42304 48251 14.1%
Expenditure 10535 13847 31.4% 30993 40789 31.6%
Operating profit (EBDITA) 3,896 639 -83.6% 11311 7462 -34.0%
Operating profit margin (%) 27.0% 4.4%   26.7% 15.5%  
Other income 894 1309 46.4% 2645 3895 47.3%
Depreciation 1030 1235 19.9% 2898 3434 18.5%
Interest 1 1   0 0  
Profit before tax 3759 712 -81.1% 11057 7924 -28.3%
Tax 1199 200 -83.3% 3417 2050 -40.0%
Profit after tax/(loss) 2560 512 -80.0% 7641 5874 -23.1%
Net profit margin (%) 17.7% 3.5%   18.1% 12.2%  
No. of shares (m)         2577.2  
Diluted earnings per share (Rs)*         3.4  
P/E ratio (x)*         17.6  
* On a trailing 12 months basis

What has driven performance in 3QFY12?
  • Nalco reported a marginal topline growth of 0.4% YoY during the quarter ended December 2011. This was due to lower selling prices of alumina and aluminium. Sales volume growth also declined due to stock build up. While revenues from chemicals segments grew by 24.8%, revenues from aluminium segment declined by 2.3%. Revenues from electricity segment grew by 86.6% YoY.

    Cost breakup
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Raw Materials 1199 2388 99.3% 4392 6905 57.2%
    % of sales 8.3% 16.5%   10.4% 14.3%  
    Staff costs 2309 3013 30.5% 6520 8786 34.8%
    % of sales 16.0% 20.8%   15.4% 18.2%  
    Power & fuel 4426 5683 28.4% 12968 16878 30.1%
    % of sales 30.7% 39.2%   30.7% 35.0%  
    Manufacturing Expenses 1715 1830 6.7% 4650 5359 15.2%
    % of sales 11.9% 12.6%   11.0% 11.1%  
    Other Expenses 886 933 5.2% 2463 2862 16.2%
    % of sales 6.1% 6.4%   5.8% 5.9%  

  • Production of aluminum declined sharply from 0.11 m tonnes in 3QFY11 to 0.09 m tonnes in 3QFY12 as the company had shutdown 120 pots by the end of previous quarter. The pots were closed due to lower availability of coal. Alumina production increased during the quarter from 0.39 m tonnes in 2QFY12 to 0.41 m tonnes due to higher production from the new refinery.

  • Operating profits saw a decline of 83.6% YoY. This is because the cost of production, mainly the cost of raw materials and power remained high, hurting margins of all producers, including the cheapest producers like Nalco. Employee costs jumped 28.4% YoY due to a one off of Rs 380 m provisioning for previous quarter. Operating margins declined by 22.6% YoY. Coal costs continue to remain high which forced the company to shutdown 120 pots at its smelter in Angul.

  • Rising raw material cost and lower aluminium prices led the bottomline to decline by 80% YoY during the quarter. Net profit margins declined from 17.7% in 3QFY11 to 3.5% in 3QFY12. During the quarter, LME aluminium prices were down by US $300.

What to expect?
The stock price of NALCO has run up more than 20% over the last one month on the back of improved metal prices. The company has increased aluminium prices by Rs 2,000 per tonne across all products in the month of January. Even with the price increase, aluminium prices are lower by 14% compared to January 2011. As a result the management is not likely to increase production, which means it will report a drop in production for the year. The company faces risk of higher coal costs, uncertainty over global financial health and slower ramp up in alumina refinery. We have reduced our volume estimates for FY12 and FY13 incorporating the management strategy of keeping aluminium smelter pots idle and slower ramp up in new refinery and have factored in the risks faced by the company in our estimates.

At the current price of Rs 62, Nalco is trading at 1.14 times our adjusted book value. We maintain a HOLD on the stock.

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