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Nalco: Forgettable year - Views on News from Equitymaster

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Nalco: Forgettable year

Apr 30, 2008

Performance summary
  • Led by a stronger rupee and weaker realisations, the company’s topline has shrunk 16% for the full year on a YoY basis.
  • Huge contraction in operating margins to the tune of more than 1,500 basis points (15%) has led to a 38% YoY fall in operating profits during FY08.

  • Bottomline for the full year has declined by 32% YoY on the back of a weaker operating performance. The company’s net profits have come in 9% below our estimates.

  • Bottomline for the fourth quarter has plunged 32% YoY on the back of a 10% fall in topline.

(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 15,668 14,057 -10.3% 59,425 49,884 -16.1%
Expenditure 6,869 8,386 22.1% 24,083 27,964 16.1%
Operating profit (EBDITA) 8,798 5,671 -35.5% 35,342 21,920 -38.0%
EBDITA margin (%) 56.2% 40.3%   59.5% 43.9%  
Other income 1,199 1,350 12.6% 4,025 5,683 41.2%
Interest (net) - -   - 7  
Depreciation 819 758 -7.4% 3,121 2,794 -10.5%
Profit before tax 9,178 6,263 -31.8% 36,247 24,802 -31.6%
Tax 3,270 2,173 -33.6% 12,440 8,553 -31.2%
Profit after tax/(loss) 5,908 4,091 -30.8% 23,807 16,249 -31.7%
Net profit margin (%) 37.7% 29.1%   40.1% 32.6%  
No. of shares (m) 644.3 644.3   644.3 644.3  
Diluted earnings per share (Rs)*       36.9 25.2  
Price to earnings ratio (x)**         17.8  
(* annualised, ** on trailing twelve months earnings)

What has driven performance in FY08?
  • Not since FY02 has the company seen its topline decline for the full year. This is despite the fact that it has notched up impressive performance on the physical front with capacity utilisation at both the refinery as well as the smelter touching the 100% mark. As per reports, the company’s production of alumina increased by 7% while that of aluminium remained largely stable. Since exports contribute nearly 40% to the company’s revenues, the continued fall in dollar against the rupee hurt the company’s rupee realisations per tonne during the fiscal. It is estimated that the company lost Rs 6 bn worth of potential revenues because of the rupee’s rise against the dollar. Furthermore, prices of metals in the international markets also cooled off a bit and this acted as a double whammy on the company, resulting in a 16% YoY fall in topline.

    cost break up
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08
    Raw materials 1,819 1,701 -6.5% 5,440 5,590
    % sales 11.6% 12.1%   9.2% 11.2%
    Power and fuel 2,147 2,684 25.0% 8,523 9,949
    % sales 13.7% 19.1%   14.3% 19.9%
    Staff cost 1,218 1,921 57.7% 3,840 5,447
    % sales 7.8% 13.7%   6.5% 10.9%
    Other expenditure 1,686 2,081 23.4% 6,280 6,977
    % sales 10.8% 14.8%   10.6% 14.0%

  • Since operating margins for most of the metal companies are quite sensitive to realisations, Nalco’s poor performance on the topline front got magnified at the operating level, resulting into a 38% YoY fall in operating fronts for the full year. Operating margins also took a big hit, tumbling by more than 1,500 basis points (15%). Furthermore, the unrelenting rise in fuel prices and staff costs also played its part in bringing the operating profits down for the quarter as well as the full year.

  • The fall in bottomline at 32% YoY came in slightly better than the operating level performance because of a strong 41% YoY increase in other income and an 11% YoY fall in depreciation charges. Had it not been for the robust rise in other income, bottomline decline would have been even more severe.

What to expect?
At the current price of Rs 447, the stock is trading at a multiple of 2.6 times its estimated FY10 book value. The company has lined up some robust expansion plans not only in the domestic but also in the international markets. These plans, we believe, will accelerate the process of monetizing its world-class bauxite reserves and hence, give a boost to the intrinsic value of the company. Successful execution of the same however remains the key to the unlocking of this value. We shall revise our numbers on the company shortly.

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