Nalco: Loses sheen

Public sector aluminium major, National Aluminium Company Ltd. (Nalco), has reported provisional numbers for the quarter and year ended March '02. With the downturn in global demand and weaker prices the concluded fiscal was a tough year for commodity manufacturers. The 9/11 incidents also hit the global aluminium sector, as airline manufacturing business came to a stand still.

(Rs m)	4QFY01	4QFY02	Change	FY01	FY02	Change
Net Sales	6,296	6,498	3.2%	22,615	22,254	-1.6%
Other Income	395	412	4.3%	1,600	1,453	-9.2%
Expenditure	3,761	4,079	8.4%	11,861	13,155	10.9%
Operating Profit (EBDIT)	2,535	2,419	-4.6%	10,754	9,100	-15.4%
Operating Profit Margin (%)	40.3%	37.2%		47.6%	40.9%
Interest	241	321	33.0%	976	1,133	16.1%
Depreciation	773	781	1.0%	2,944	3,107	5.5%
Profit before Tax	1,916	1,730	-9.7%	8,434	6,313	-25.1%
Extraordinary items	241	19		240	(1,041)
Tax	570	378	-33.7%	2,116	1,197	-43.4%
Profit after Tax/(Loss)	1,587	1,371	-13.6%	6,558	4,074	-37.9%
Net profit margin (%)	25.2%	21.1%		29.0%	18.3%
No. of Shares	644.3	644.3		644.3	644.3
Diluted Earnings per share*	9.9	8.5		10.2	6.3
P/E Ratio		10.7			14.4
(annualised)

Nevertheless, from the lows in 2QFY02, Nalco has been able to script a comeback with marginal increase in sales for 4QFY02. The last quarter has not been able to salvage topline, which was dented over the preceding two quarters. Having said that, effective excise rate has halved in 4QFY02, which has facilitated growth in net sales. It seems, much of the slowdown in sales is due to dip in realisations. Large presence in export markets, which contribute little more than 50% of sales, is likely to have exacerbated the slide. Alumina and aluminium production is higher by 18.5% and 0.5% respectively over the corresponding periods of the previous year.

As mentioned in our earlier reports, with majority of revenue generated from upstream business the company's financials are more susceptible to cyclicality. Consequently, margins were severely impacted with aluminium prices weakening by an estimated 10% during fiscal '02. At the same time, raw material expenses, which accounted for a quarter of operating costs, were higher by 30%. This suggests that raw material prices -- bauxite & alumina -- did not decline commensurately with the slide in aluminium prices. Also, sale volumes, as reflected in production, is likely to have grown. OPM is lower by 7.7 percentage points in FY02.

Interest costs have been steadily rising over the past three quarters. This is despite a sharp spurt in FY01. The downturn in economic environment could have increased days of receivables outstanding, adversely impacting working capital management. The extraordinary items pertain to write back of additional provision for tax in earlier years. Also, in 2QFY02, Nalco had undertaken a revision of executive and non-executive pay scales, which has led to higher staff costs of Rs 165 m YoY for each quarter. For non-executive employees, the company entered into a ten-year wage settlement with retrospective effect from January '97, which has given rise to a one time settlement cost of Rs 1,060 m in FY02.

Nalco was expected to complete the alumina refinery expansion by January '02. The company commenced commercial production on the third stream of expanded capacity -- 525,000 MMTPA -- in March '02. The effective tax rate has declined by 610 basis points in FY02. This could be due to the capital expenditure programme undertaken by the company.

At Rs 91 the scrip is trading on a multiple of 14.4x FY02 earnings. Over the past six months the scrip has almost doubled. At the end of 1HFY02, the scrip was trading on a multiple of 5.7x annualised earnings adjusted for extraordinary items. The higher valuation is due to disinvestment expectations. The Government has indicated that the company will be divested in the current fiscal.