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Nalco: A dividend Navratna

Apr 8, 2009

In the previous articles, we have seen the dividend track records of three metals companies viz Tata Steel and Hindalco from the private sector and SAIL from the public sector. In this article, we have studied another public sector metal player Nalco and its dividend track record.

National Aluminium Company (Nalco) 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 India and has the distinction of being one of the lowest cost producers of alumina in the world. Its 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 strong presence in the exports markets, which contributes nearly 40% to its gross sales.

Nalco has a greater presence in the upstream business and hence the cyclicality factor has a major bearing on the company's performance. However, it has initiated steps to diversify into the downstream segment in order to insulate itself from the volatility in aluminium prices.

Nalco dividend Vs EPS
Source: CMIE

Nalco has been continuously paying dividends to its shareholders since the last 15 years. It is a major achievement for a public sector metal company to maintain such a track record. Hence, given this long history, there are very little chances that the company might stop paying dividends to its shareholders in future.

The company had been able to grow its dividend per share at a CAGR of 26% between the period FY95 and FY08. The average dividend payout ratio during the period stood at around 31%, while the average return on net worth was around 20%. This is quite an impressive achievement by the company as it operates in a cyclical industry. It may be noted that the company is a public sector undertaking and is one of the Navratna companies of government. Dividends are the major route through which the company can disburse profits to the government. Given the long track record and the government’s need for funds, there is very little chance that the company might stop paying dividends to its shareholders in future.

At the current price level, the dividend yield for Nalco is around 3%. Assuming the company continues to grow its dividend per share over 25% per annum, the investor would be able to get a 10% return annually on his investment from dividends alone from the 6th year onwards. It may be also noted that Nalco had around Rs 40 bn of cash at the end of December 2008.

Despite the strong growth in dividends per share, the company may not be done just yet. This is because there is still enough potential for the company given the low consumption levels of aluminium in highly populous countries like India and China. Although higher growth would call for greater investments in capex, its low cost operations and strong balance sheet would ensure that it is able to do both, which is invest in new capacities as well as keep paying strong dividends.

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