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Nalco: Realisation gains - Views on News from Equitymaster

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Nalco: Realisation gains

May 2, 2006

Performance Summary
Public sector aluminium and alumina major, Nalco, declared its results for the quarter and year ended March 2006 during the weekend. The company has registered robust topline as well as bottomline growth in the said periods. While for 4QFY06, the topline and bottomline growth rates are at 25% and 40% YoY respectively, for the full year, the company’s earnings have grown by 27% on the back of a 19% growth in topline. Further, the company has improved upon its operating margins in both the periods. This performance by the company is resultant of the continued strength being witnessed in the aluminium industry.

(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net Sales 12,347 15,380 24.6% 41,240 48,887 18.5%
Expenditure 6,375 5,675 -11.0% 19,850 23,053 16.1%
Operating Profit (EBDITA) 5,973 9,705 62.5% 21,390 25,834 20.8%
EBITDA margin (%) 48.4% 63.1%   51.9% 52.8%  
Other income 1,093 851 -22.1% 2,506 2,276 -9.2%
Interest 110 -   606 -  
Depreciation 1,143 894 -21.8% 4,587 3,787 -17.4%
Profit before tax 5,813 9,663 66.2% 18,703 24,323 30.1%
Tax 1,470 3,582 143.7% 6,354 8,676 36.5%
Profit after Tax/(Loss) 4,342 6,080 40.0% 12,348 15,647 26.7%
Net profit margin (%) 35.2% 39.5%   29.9% 32.0%  
No. of Shares (m) 644 644   644 644  
Diluted earnings per share       19.2 24.3  
Price to earnings ratio (x)         13.4  

India’s largest alumina player
Nalco is the largest alumina and second largest aluminium producer in India. 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 has already received the approval from the Cabinet Committee on Economic Affairs (CCEA) for its Rs 41 bn expansion plan.

Nalco’s expansion plan entails the expansion of its mining capacity from the present level of 4.8 million tonnes to 6.3 million tonnes, the capacity of its refinery at Dhamanjodi from 1.6 m tonnes to 2.1 m tonnes, aluminium capacity from the current 345,000 tonnes to 460,000 tonnes and power generation capacity from 960 MW to 1,200 MW. The company intends to meet this cost of expansion of Rs 40 bn out of internal resources and to an extent from commercial borrowings. This capacity is likely to come on stream only during FY09.

What has driven performance in 4QFY06?
It’s all about realisations: Nalco reported a strong 25% growth in topline for the quarter ending March 2006, which could be attributed solely to better price realisations. The company operates in two segments – alumina (43% of revenues in FY06) and aluminium. While Nalco does not declare volume sales numbers, considering that the aluminium and alumina production growth during the quarter was almost flat 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. However, considering that average alumina prices were higher by 79% YoY during the quarter, the company seems to have benefited immensely from this. It must be noted that as per the segmental numbers declared by the company, alumina sales have increased by 86% YoY. The scenario for the full year was not much different. While alumina production was higher by 1% YoY in FY06, average alumina prices were higher by 42% YoY, which seemingly helped the company report the 31% YoY growth in alumina sales for FY06.

As far the aluminium segment was concerned, average aluminum prices during the quarter and the year ending March 2006 were higher by 27% and 14% YoY respectively, and has been the key driver for the company’s aluminium sales. Nalco’s aluminium sales grew by 9% YoY and 16% YoY in the respective periods. Aluminium production for the year was higher by 6% YoY.

Cost break-up (% of net sales)
  4QFY05 4QFY06 FY05 FY06
Inc/Dec in stock in trade 4.6% 0.0% -0.6% -1.2%
Raw material consumed 11.2% 7.9% 10.8% 10.7%
Power & Fuel 15.9% 14.8% 18.4% 19.1%
Staff costs 6.3% 5.7% 7.0% 6.7%
Other expenses 13.6% 8.4% 12.5% 11.9%
Total expenses 51.6% 36.9% 48.1% 47.2%

Operating margins through the roof: The operating margins of the company leapfrogged by over 1,470 basis points from 48% in 4QFY05 to 63% in 4QFY06. Since commodity players (in this case Nalco) have high operating leverage, any significant improvement in realisations flows directly to the bottomline. Further, since there has virtually been no growth in production, the operating expenditure has actually decreased by 11% YoY, aided by higher operating efficiencies. On the QoQ basis also, operating margins have registered a sharp increase from 50% in 3QFY06.

Net profits underperform: Despite the 63% YoY growth in operating profits, the bottomline of the company registered a rise of 40% YoY. The impact of lower other income (down 22% YoY) was negated by the fall in depreciation chares (down 22% YoY) and ‘nil’ interest expense. Thus, PBT was up 66% YoY. However, a significantly higher tax outgo (up 144% YoY) depressed the bottomline growth, which was primarily because of lower tax component in the corresponding quarter of the previous fiscal. It must be noted that for the full year, the tax provisioning is almost in line with that of the previous year.

Performance over the past few quarters…
  4QFY05 1QFY06 2QFY06 3QFY06 4QFY06
Net sales growth (YoY, %) 25.2% 19.0% 7.2% 21.5% 24.6%
Net profit growth (YoY, %) 59.3% 28.1% 2.7% 28.4% 40.0%
Operating margins (%) 48.4% 50.0% 43.8% 50.2% 63.1%

What to expect?
At Rs 326, the stock is trading at 13.4 times its FY06 earnings and over 3 times P/BV. In wake of the strong FY06 performance and considering the current strength in the aluminium cycle, we will be upgrading our forward estimates for the company. It must be noted that aluminium and alumina prices have been hovering at multi-year highs, the positive impact of which would continue to reflect in the ensuing quarters. Nonetheless, even after this adjustment, the stock would remain richly valued, though the near-term momentum could be sustained in the stock, owing to continued flow of strong numbers over the next few quarters.

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Aug 26, 2019 09:59 AM