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Nalco: Lackluster performance…
Apr 25, 2007

Performance summary
Nalco, the leading alumina and aluminium player in the country, recently announced results for the quarter and full year ended March 2007. While the company reported a marginal topline growth of 2% YoY for the quarter, operating profits were impacted on account of higher input costs. Strengthening of the rupee must have impacted topline as company derives more than 50% of its revenues from exports. Apart from not so impressive topline growth, the rising cost of production has impacted company’s profitability. Had not the other income grown by almost 41% YoY, net profits would have declined more than the current 2% fall. Performance for the full year has however been enthusing, as it has reported a 52% bottomline growth on the back of a 22% growth in topline. Operating margins too, have expanded by 670 basis points.

Financial performance snapshot
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net sales 15,380 15,668 1.9% 48,887 59,425 21.6%
Expenditure 5,675 6,869 21.0% 23,053 24,083 4.5%
Operating profit (EBITDA) 9,705 8,798 -9.3% 25,834 35,342 36.8%
EBITDA margin 63.1% 56.2%   52.8% 59.5%  
Other income 851 1,199 40.8% 2,276 4,025 76.9%
Depreciation 894 819 -8.4% 3,787 3,121 -17.6%
Profit before tax/(loss) 9,663 9,178 -5.0% 24,323 36,247 49.0%
Tax 3,582 3,270 -8.7% 8,676 12,440 43.4%
Profit after tax/(loss) 6,080 5,908 -2.8% 15,647 23,807 52.2%
Net margin 39.5% 37.7%   32.0% 40.1%  
No of shares (m) 644 644   644 644  
Diluted EPS (Rs)*         36.9  
P/E (times)         6.7  
*trailing twelve month earnings

What is company’s business?
Nalco is the largest alumina and second largest aluminium producer in India. Nalco is Asia's largest integrated aluminium complex, encompassing bauxite mining, alumina refining, aluminium smelting and casting, power generation, rail and port operations. The company is amongst the lowest cost producers of the base metal in the world. It has a competitive edge vis-à-vis its peers due to factors like rich bauxite reserves, captive power plants and rail and port operations. The company derives more than 50% of its revenues from exports. The company does not incur interest cost as it being a zero debt company.

What has driven performance in 4QFY07?
Realisations to the rescue: The full year performance of the company has been enthusing as the topline grew 22% YoY. However, 4QFY07 was not so impressive as production growth was tad lower during the quarter as compared to same period last year. While the company does not declare volume sales numbers, considering that the aluminium production growth during the quarter was a tad lower compared to the corresponding quarter of the previous fiscal, this could be taken as an indication of flat growth in sales volume during the quarter. Further, strengthening of rupee must have impacted topline as company derives more than 50% of its revenues from exports. Despite lower production and flat sales volume, a 2% YoY topline growth was mainly driven by strong aluminium prices on the LME.

Particulars 4QFY06 4QFY07 Change
Alumina (Metric tonnes) 403,400 395,700 1.9%
Aluminium (Metric tonnes) 89,873 88,820 1.2%
Electricity (Million units) 1,549 1,537 0.8%

Inflationary pressure: The operating profits of the company have declined by almost 9% YoY during the quarter on account of rising cost of production and lackluster growth in topline. Except for power and fuel costs, all cost heads have increased as a percentage of sales. While inflationary pressure is reflected in the rising cost of production, marginal savings in power cost is the result of setting up of captive power plants. As mentioned earlier, while 4QFY07 performance was not encouraging, operating margins of the company have expanded by almost 670 (6.7%) basis points for the year ended FY07.

Cost break-up (% of Sales) 4QFY06 4QFY07
Consumption of raw material 8.0% 11.6%
Staff cost 5.7% 7.8%
Power and fuel 14.8% 13.7%
Other expenditure 8.4% 10.8%
Total Cost 36.9% 43.8%

Other income saves the day: Had not the other income grown by almost 41% YoY, net profits would have declined by 9% YoY, in line with operating profits. Though the quarterly performance is lackluster, for the year ended FY07, the company has witnessed 52% YoY growth in topline. Even if one were to exclude the other income effect (77% YoY growth) net margins have expanded by almost 590 basis points (5.9%) on account of lower depreciation and 37% YoY growth in operating profits.

As given in the table below, in the recent past, EBITDA margins have witnessed a downward trend on account of rising input costs.

Particulars 4QFY06 1QFY07 2QFY07 3QFY07 4QFY07
Net Sales growth (YoY, %) 24.6% 51.8% 37.7% 9.3% 1.9%
Net profit margin (%) 39.5% 41.9% 41.3% 39.5% 37.7%
EBITDA margin (%) 63.1% 62.9% 60.7% 58.3% 56.2%

What to expect?
At the current price of Rs 249, the stock is trading at a price to earnings multiple of 6.7 times its trailing twelve month earnings. Growing demand and a favorable demand supply equation is 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 may also come under pressure as the industry is expected to witness excess supply of 0.562 MT in 2007 as compared to 0.287 MT supply shortage in 2006.

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