Nalco: A brief overview... - Views on News from Equitymaster

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Nalco: A brief overview...

Apr 11, 2007

Nalco is the largest alumina and second largest aluminium producer in India. The company is Asia's largest integrated aluminium complex, encompassing bauxite mining, alumina refining, aluminium smelting and casting, power generation, rail and port operations. Its alumina and aluminium capacities currently stand at 1.6 m tonnes per annum (MTPA) and 0.35 MTPA respectively. Presence across the value chain with operations in mining, refining and smelting along with access to high quality bauxite and captive power plants, work to the company's advantage. It has a high presence in the exports markets, which contributes nearly 50% to its topline. The company is amongst the lowest cost producers in the world, a consequence of its integrated operations among other things. It has a competitive edge vis-a-vis its peers due to factors like rich bauxite reserves, captive power plants and rail and port operations. The company does not incur interest cost as it being a zero debt company. While alumina segment accounts for only 40% of the total revenues (remaining 60% contributed by aluminium segment), it makes up 60% to 65% of the profits before tax and interest.

Financial performance:

On account of improved physical performance and improved realisations the top line of the company grew at CAGR of almost 24% in past 3 years. What has been impressive though is the improvement in operating margins, bulk of which could be attributed to improved realisations. This is further evident from the fact that while operating costs have increased at a CAGR of 14%, operating profits have registered a growth of 38% during the same period on the back of strong demand for the metal that led to better realisations.

Even during downturns, the company has consistently managed to maintain relatively high levels of operating margins by keeping a constant check on various expense heads. Setting up captive power plants and efficient utilisation of available resources has helped the company curtail its costs.

Nalco, which has predominantly been an alumina and a primary metals player, has always considered adding more value by venturing into the downstream segment. The downstream segment is relatively more insulated from demand changes and fluctuations in aluminium prices.

Particulars FY03 FY04 FY05 FY06
Net Sales 25,633 31,145 41,223 48,887
Expenditure 15,750 17,073 19,789 23,053
Operating Profit 9,883 14,072 21,434 25,834
Operating profit margin (%) 38.6% 45.2% 52.0% 52.8%
Other Income 2,266 1,994 2,432 2,276
Depreciation 3,597 4,578 4,642 3,787
Interest 1,031 998 605 -
Profit before tax 7,521 10,490 18,619 24,323
Tax 2,301 3,134 6,395 8,676
Net Profit 5,221 7,356 12,224 15,647
Net profit margins (%) 20.4% 23.6% 29.7% 32.0%

Being a commodity player, the company enjoys high operating leverage and therefore, any significant improvement in realisations flows directly to the bottomline. The company achieved debt-free status in FY05. The debt free status, apart from operational efficiency and improved realisations has further helped company expand net margins. However, going forward, spiraling crude oil prices and shortage of coal in domestic markets will have significant impact on the cost of production of aluminium, in turn impacting margins.

What to expect?

Nalco's expansion plan entails the expansion of its mining capacity from the present level of 4.8 m tonnes to 6.3 m tonnes, the capacity of its refinery from 1.6 m tonnes to 2.1 m tonnes, aluminium smelter capacity from the current 345,000 tonnes to 460,000 tonnes and power generation capacity from 960 MW to 1,200 MW. Growing demand and favourable demand supply equation are viewed as positive for a company in the aluminium business. However, Nalco needs to come up with the planned capacity as per schedule to benefit from the same.

The all time high aluminium prices have started witnessing pressure as the aluminium industry is expected to witness excess supply of 0.562 MT in 2007 as compared to 0.287 MT supply shortage in 2006. The emergence of China as a major player in the global aluminium market could dent realizations and in turn may affect margins in the long term.

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