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Nalco: Margin pressure relents
May 17, 2010

Nalco has announced its FY10 results. The company has reported a 1.4% YoY and 34.6% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline grows by 44% YoY during 4QFY10.
  • EBITDA margin expands to 33% during 4QFY10, up from 8.5% in 4QFY09 due to lower raw material and staff cost (as a percentage of sales).
  • Other income declines by 39% YoY.
  • Topline declines by 1.4% YoY during FY10, while bottomline declines 34.6% YoY for the full year due to lower margins and higher depreciation.


Financial snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 11,257 16,260 44.4% 52,308 51,580 -1.4%
Expenditure 10,301 10,849 5.3% 34,268 40,118 17.1%
Operating profit (EBDITA) 956 5,411 466.2% 18,040 11,462 -36.5%
EBDITA margin (%) 8.5% 33.3%   34.5% 22.2%  
Other income 1,078 658 -39.0% 4,001 3,689 -7.8%
Interest 29 1 -97.6% 40 22 -45.7%
Depreciation 713 878 23.2% 2,730 3,188 16.8%
Profit before tax 1,292 5,189 301.7% 19,272 11,941 -38.0%
Tax 462 1,275 176.1% 6,549 3,615 -44.8%
Profit after tax/(loss) 830 3,915 371.5% 12,723 8,326 -34.6%
Net profit margin (%) 7.4% 24.1%   24.3% 16.1%  
No. of shares(m)       644    
Diluted earnings per share (Rs)     13      
Price to earnings ratio (x)       31.8    

What has driven performance in FY10?
  • Nalco reported a decline in topline of 1.4% YoY during FY10. This was despite London Metal Exchange (LME) prices, which have remained firm.

  • The company’s operating margin expanded to 33% during 4QFY10, up from 8.5% in 4QFY09 due to lower raw material and staff cost (as a percentage of sales).

    Cost break-up
    (Rs m) 4QFY09 4QFY10 Change
    Raw materials 2,868 2,586 -9.9%
    % sales 25.5% 15.9%  
    Power and fuel 2,777 4,021 44.8%
    % sales 24.7% 24.7%  
    Staff cost 2,774 1,902 -31.5%
    % sales 24.6% 11.7%  
    Other expenditure 1,881 2,341 24.4%
    % sales 16.7% 14.4%  
    Total cost 10,301 10,849 5.3%
    % sales 91.5% 66.7%  

  • During FY10, Nalco’s other income declined by 7.8% YoY. At the bottomline level, the company registered a decline of 34.6% YoY for the full year due to lower margins and higher depreciation.

What to expect?
Global aluminium demand increased 27%YoY in 4QFY10 due to the sharp rise in Chinese demand and the low base effect. Consumption in most other regions is also improving after the severe crash seen during the economic downturn. At the end of March, 2010 LME stocks were 4.6 m tons. We expect demand to be strong on the back of construction, electrical and transportation sectors.

At the current price of Rs 411 per share, Nalco is trading at 2 times our expected FY12 book value per share. At this juncture prices fully reflect the underlying asset value leaving little room for a bargain for investors.

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