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Nalco: Power & fuel costs decline - Views on News from Equitymaster
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Nalco: Power & fuel costs decline
Feb 13, 2015

Nalco has announced its results for the quarter ended December 2014. The company has reported a 15.9% YoY and 170.5% YoY growth in sales and net profits respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Topline of the company increased by 15.9% YoY.
  • At the operating level, the company reported an increase in profits of 158% YoY as expenditure declined 4.2% YoY. A fall in expenditure boosted operating margins which stood at 27.7% for 3QFY15 as compared to 12.4% for 3QFY14.
  • Net profits increased by 170.5% YoY. Strong performance at the operating level and 25.5% rise in other income cushioned profits at the net level.

Financial performance snapshot
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Net sales 16,439 19,060 15.9% 49,427 55,816 12.9%
Expenditure 14,396 13,788 -4.2% 43,177 43,036 -0.3%
Operating profit (EBDITA) 2,043 5,272 158.0% 6,250 12,780 104.5%
Operating profit margin (%) 12.4% 27.7%   12.6% 22.9%  
Other income 1,208 1,516 25.5% 4,223  5,106 20.9%
Interest (net) - - NA -  - NA
Depreciation 1,308 1,165 -10.9% 3,838  3,158 -17.7%
Profit before tax 1,943 5,623 189.4% 6,635 14,728 122.0%
Tax  633 2,079 228.4% 1,936  5,058 161.3%
Profit after tax/(loss) 1,310 3,545 170.5% 4,699  9,670 105.8%
Net profit margin (%) 8.0% 18.6%   9.5% 17.3%  
No. of shares (m)          2,577  
Diluted earnings per share (Rs)         3.75  
P/E ratio (x)*         11.3  
* On a trailing 12 months basis

What has driven performance in 3QFY15?
  • Net sales of the company increased by 15.9% YoY due to strong performance from the aluminum business (+19.6% YoY) as well as the chemical business (16.9% YoY).

  • Operating profits surged 158% YoY during the quarter as power & fuel costs contributing about 1/3rd of the total expenses fell 14% YoY. Aluminum EBIT came in at Rs 1,491.3 m as compared to a loss of Rs 254.5 in 3QFY14. Chemical EBIT also jumped sharply by 116% YoY during the quarter.

  • PAT was up 170.5% YoY, imitating strong operational performance. A 10.9% YoY fall in depreciation expenses and a 25.5% YoY rise in other income boosted profits.
What to expect?
At the current price of Rs 50, the stock is trading at a multiple of 11.3x its TTM earnings. Nalco's earnings have remained extremely volatile in the past few quarters because of a sharp movement in power and fuel costs. However, in this quarter as well as the nine month period, power & fuel costs have declined on a YoY basis as there was no import of external power. This coupled with captive consumption of bauxite resulted in sharp rise in aluminum EBIT. What is further encouraging is the fact that the profitability of this segment has improved substantially on a QoQ basis as well.

However, considering the volatility in raw material costs which have now subsided and reflected in our estimates the stock offers little upside from current levels. As a result, we maintain our SELL view on the stock.

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