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Aluminium giant regains its lost glitter... - Views on News from Equitymaster
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  • May 13, 2000

    Aluminium giant regains its lost glitter...

    During financial year 2000, this company created new records in production of bauxite, hydrate and aluminium. It achieved the highest ever turnover in a year in its eighteen year history. Its export turnover (50 percent of sales) too was at an all time high. Infact it is the only domestic Indian company that links its product prices to those prevailing on the London Metal Exchange (LME).

    National Aluminium Company Limited (Nalco), a public sector company, is India's most efficient aluminium producer. The company, in its short 18-year history, has grown to become the second largest producer of primary metal in India. Nalco is currently in the midst of a large capacity expansion, both upstream and downstream. Simultaneously, it is also initiating measures to improve its cost efficiencies.

    Nalco derives its cost efficiencies from the high level of integratedness in its operations. The company has captive bauxite mines, the primary raw material for the manufacture of alumina. It also has a captive power plant that meets all its consumption needs. Its alumina output is enough to meet captive requirements of its aluminium smelter and infact the company is a net seller. Such a structure has enabled the company to keep a tight grip on its costs. In an attempt to further cut costs, the company has applied to the government to allot it coal fields - the raw material for its 720 megawatt power plant.

    Nalco's financial performance in financial year 1999 was marred by a collapse in global aluminium prices, which resulted in a sharp fall in profitability. However, in financial year 2000, the company has rebounded. Gross turnover rose 42 percent even as net profits jumped over 100 percent to Rs 5.1 billion. The turnaround was made possible by the sharp rise in global aluminium and alumina prices. Global demand too grew by over 4 percent. These two factors, high demand and prices, pushed the company's performance into record territory.

    Riding the upturn
    (Rs m) FY99 FY00 Change
    Sales 15,505 21,257 37.1%
    Other Income 1,716 1,279 -25.5%
    Expenditure 10,627 11,853 11.5%
    Operating Profit (EBDIT) 4,878 9,404 92.8%
    Operating Profit Margin (%) 31.5% 44.2%  
    Interest 381 634 66.6%
    Depreciation 2,841 3,215 13.2%
    Profit before Tax 3,372 6,834 102.6%
    Tax 890 1,713 92.5%
    Profit after Tax/(Loss) 2,483 5,121 106.3%
    Net profit margin (%) 16.0% 24.1%  
    Earnings per share 3.85 7.95 106.5%

    Nalco has initiated measures to sustain its growth curve in coming years. Plans are afoot to nearly double the company's calcined alumina capacity while adding significantly to the aluminium smelting capacity. Its mining operations too are being stepped up to meet the enhanced requirements. The company's downstream plans have got a boost after it got the government's approval to merge International Aluminium Products Limited (IAPL) with itself. IAPL, which is likely to go onstream within a year, will add a 50,000 tonnes per annum of cold rolled products to Nalco's output. IAPL will operate as a 100 percent export oriented unit of Nalco.

    The aggressive capacity expansion plans are being financed from internal resources. Of the total approved capital cost (Rs 41.2 bn) to be incurred by the company, Rs 27.6 bn has already been committed. In a recent investor conference Nalco indicated that it would not be taking on debt to meet the remaining expenditure. This strategy will minimise the cost of expansion and limit the pressure (due to higher interest costs) on the bottomline of Nalco.

    India, a better bet
    (Rs per tonne) FY99 FY00
    Domestic Market    
    Metal 68,662 75,091
    Export Market    
    Metal 52,510 66,740
    Alumina 6,921 8,264

    In recent months, two significant developments have led to the sharp erosion in Nalco's market capitalisation. First, the government has decided to withdraw export incentives (with some exceptions) across most industries in a graded manner from this year onwards. For a company like Nalco, which exports 50% of its output, the possibility of higher tax burden dealt a severe blow to sentiment. Next came the decline in aluminium metal prices. After having peaked at around US$ 1,700 in December 1999, prices have tumbled significantly. Currently the price is ruling at approximately US$ 1,500 per tonne. Alumina prices too have receded from $ 400 in December 1999 and are currently quoting at US$ 250 per tonne.

    Nalco is currently in the process of drafting a 'vision document' and growth plan for the next 20 years. The plan will enable the company to identify new businesses (related or unrelated) that will propel growth in coming years.

    Nalco's aggressive attitude belies its public sector status. In coming years, with increasing competition both in domestic and international markets, it is this attitude that will hold it in good stead.



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