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Nalco: Metal shines - Views on News from Equitymaster
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  • Apr 30, 2003

    Nalco: Metal shines

    Public sector aluminium major, National Aluminium Company Ltd. (Nalco), announced its numbers for the quarter and year ended March '03. Given the lackluster global aluminium demand and weaker prices, the concluded fiscal was a tough year for aluminium manufacturers. However, Nalco has been able to effectively combat the global slowdown, which is evident from the results declared by the company.

    Barring the first quarter (5% fall in bottomline), the subsequent three quarters have been relatively good for the company. After posting a 16% rise in topline and bottomline in 3QFY03, the company has been able to improve performance at PAT level in 4QFY03. The company’s topline for the quarter ended March ’03 increased by 11% while its bottomline improved by 29%.

    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Net Sales 6,498 7,215 11.0% 22,254 25,633 15.2%
    Other Income 412 859 108.5% 1,453 2,266 56.0%
    Expenditure 4,079 4,518 10.8% 13,155 15,750 19.7%
    Operating Profit (EBDIT) 2,419 2,696 11.5% 9,100 9,883 8.6%
    Operating Profit Margin (%) 37.2% 37.4%   40.9% 38.6%  
    Interest 321 115 -64.0% 1,133 1,031 -9.0%
    Depreciation 781 943 20.8% 3,107 3,597 15.8%
    Profit before Tax 1,730 2,497 44.4% 6,313 7,521 19.1%
    Extraordinary items 19 -   (1,041) -  
    Tax 378 730 93.2% 1,197 2,301 92.1%
    Profit after Tax/(Loss) 1,371 1,767 28.9% 4,074 5,221 28.1%
    Net profit margin (%) 21.1% 24.5%   18.3% 20.4%  
    No. of Shares 644.3 644.3   644.3 644.3  
    Diluted Earnings per share       6.3 8.1  
    P/E Ratio         10.1  

    The company’s 4QFY03 topline rise was primarily contributed by a spurt in chemicals sales (87% rise), while the aluminium segment registered a fall of 7%. It must be noted here that Nalco is a dominant player in the alumina segment with a 1.6 million tonnes (MT) capacity while its aluminum capacity stands at 0.3 MT. The revenues from the chemicals segment (which includes alumina) showed a splendid performance in 4QFY03, as alumina prices have nearly doubled in the last two quarters from US$ 140 to US$ 250 levels. Net profit has increased by 29% in 4QFY03 primarily on account of higher other income. The spurt in depreciation charges should be viewed in the context of expansion of capacity.

    Cost breakup
    (Rs m) 4QFY02 4QFY03 Change (%) FY02 FY03 Change (%)
    Raw material 803 760 -5.4% 3,184 3,421 7.4%
    % of sales 12.4% 10.5%   14.3% 13.3%  
    Power costs 1,144 1,497 30.8% 4,455 5,643 26.7%
    % of sales 17.6% 20.7%   20.0% 22.0%  
    Staff Costs 590 766 30.0% 2,404 2,610 8.6%
    % of sales 9.1% 10.6%   10.8% 10.2%  
    Other Mfg. Exp 979 1,184 20.9% 3,158 3,784 19.8%
    % of sales 15.1% 16.4%   14.2% 14.8%  
    Total 3,516 4,207 19.6% 13,201 15,458 17.1%
    % of sales 54.1% 58.3%   59.3% 60.3%  

    For the full year, the company’s total alumina volume sales increased by 55% from 7 MT to 10.4 MT. Due to increased volume sales and higher prices, the share of the chemicals segment in the net sales of the company (excluding inter-segment transfers) has increased from 32% to 40%. The company’s aluminium sales showed a modest 7% rise in volume terms. However, the rise was negated by the weakness in average aluminium prices on the LME by 3% in the last one year. The share of aluminium sales to total revenues thus took a hit.

    On the expenditure front, Nalco has been impacted by the sharp rise in power costs. For FY03, power cost as a percentage of sales has risen to 22% in FY03 as compared to 20% in the same period last year. The increase in aluminium capacity from 230,000 tonnes to 288,000 tonnes combined with expansion of alumina capacity by 525,000 tonnes seem to be the key reason for the higher power cost. However, we expect benefits from higher metal production and commencement of the captive power plant to lower power cost incrementally.

    At the net profit level, growth is higher at 28% in FY03. But it must be noted the company had a write-off to the tune of Rs 1 bn in FY02 (due to the new wage settlement with retrospective effect from January '97). Excluding this adjustment, net profit growth stands at a meager 2% for FY03.

    At Rs 82, the stock is trading at a P/E multiple of 10x its FY03 earnings. The stock trades at a higher P/E multiple compared to its peers primarily on divestment expectations. However, the process has taken a back seat in government’s priorities for the short-term. Moreover, the company has a larger presence in the upstream business and hence the cyclicality factor has a major bearing on the company’s performance. Aluminium prices have been ruling lackluster at US$ 1,350 levels for sometime now. But with hopes of recovery in world economies and consequently the demand for aluminium, prices are unlikely to weaken going forward. Though Nalco has initiated steps to diversify into the downstream segment in order to insulate itself from the volatility in aluminium prices, the benefits of it will take sometime to accrue in a substantial way.



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