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Nalco v/s Alcoa

Mar 17, 2009

When we think of size in the aluminium industry, the first name that would come to our mind would be the international aluminium major, Alcoa. However, if one considers some of the lowest cost producers of alumina in the world, Nalco cannot be missed out. In this article, we take a look at how these two companies compare on various parameters during last five year period between FY04/CY04 and FY08/CY08.

Alcoa was formed in 1888 and is based in Pittsburgh, Pennsylvania. It is the world's leading producer of primary aluminum, fabricated aluminum, and alumina and is active in all major aspects of the industry. It serves the aerospace, automotive, packaging, building and construction, commercial transportation, and industrial markets, bringing design, engineering, production, and other capabilities of Alcoa's businesses as a single solution to customers. The Company has 87,000 employees in 35 countries. The company has operations in Asia, Australia, Europe, South America, and the United States. North America and Europe contributed around 54% and 26% of sales respectively during CY08.

National Aluminium Company (Nalco), a public sector enterprise, is India's largest producer of alumina and one of the leading producers of aluminium. It has a bauxite mining capacity of 4.8 MTPA with resources to the tune of 310 MT. Its alumina and aluminium capacities currently stand at 1.6 m tonnes per annum (MTPA) and 345,000 tonnes per annum respectively. It is the largest integrated aluminium company in the country and has the distinction of being one of the lowest cost producers of alumina in the world. It's presence across the value chain with operations in mining, refining and smelting along with access to high quality bauxite and captive power plants works as its advantages. It has a high presence in the exports markets, which contributes nearly 40% to its gross sales.

  Alcoa Nalco
Production (CY08/FY08) (000' tonnes)    
Aluminium 4,300 360
Alumina 15,000 1,575
Growth & Margins* ( 5 year avg)    
Sales growth (CAGR) 5.2% 12.1%
Avg.Op margin 15.6% 53.5%
Avg. Net profit margin 7.1% 29.0%
Leverage & Efficiency * (5 year avg)    
Asset turnover 0.7 0.7
D/E 0.5 -
Avg. RONW 11.4% 26.7%
Valuation (TTM)    
Avg P/E 25.0 9.4
Avg P/BV 0.4 1.7
* Period considered is between CY04/FY04 and CY08/FY08
Source:Reuters, Google Finance, CMIE.

As can be seen from the above table, Nalco's alumina production is merely 8% of Alcoa, Similarly its alumina capacity is 10% of Alcoa. This shows the extent to which Alcoa is bigger than Nalco. However, if one compares the sales growth of both the companies, Nalco is far ahead of its global peer. Nalco's revenues grew at a CAGR of 12.1%, while Alcoa's grew at a CAGR of 5.2%. It should be noted that the industry growth rate during the same period stood at 4.1%.

On the operating front, Nalco's average operating margins stood at around 54%. This can be owed to the fact that it is one of the lowest cost alumina producer in the world which is mainly on account of cheap labor availability and control over the value chain. Whereas Aloca's average margins during the period under consideration stood at around 16%. This is mainly on account of its diversified product portfolio and geographical presence. Furthermore, Aloca has most of its operations in the developed countries, wherein the cost of labor and other resources is comparatively higher.

The average net profit margins of Nalco stood at a 29%, while that of Alcoa at around 7% during the period under consideration. This can be gauged by the fact that Nalco's operating margins are higher as compared to Alcoa. Moreover, Nalco is a debt free company whereas Alcoa's debt to equity ratio stands at 0.9. The asset turnover ratio of Nalco and Alcoa stood at the same level 0.7, while return on networth stood at around 27% and 11% respectively during the period under consideration. Thus, Nalco beats its global peer on the leverage and RONW front also.

However, it will be surprising to note that though Nalco is more efficient than its global counterpart Alcoa on most of the parameters, as far as valuations are concerned Alcoa receives a premium over Nalco.

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