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NALCO: Other income boost
May 24, 2012

Nalco has announced its results for the quarter and full year ended March 2012. The company has reported a decline of 2.2% YoY in net sales and 7.6% YoY in net profits respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Topline declines by 2.2 % YoY during the quarter ended March 2012, despite realisations of both alumina and aluminum being higher on a QoQ basis.
  • Operating profits declined by 32.4% YoY during the quarter owing to higher expenditure. EBITDA margins declined by 7.7% YoY.
  • Net profits decreased by 7.6% YoY on account high raw material cost. Net profit margins declined by 0.9% YoY.
  • Other income grew by 63.8% YoY during the quarter ended March 2012.
  • For the full year ended March 2012, net sales increased by 9.2% YoY and net profit declined by 20.6% YoY.
  • The company has recommended a final dividend of Rs 0.1 per equity share of Rs 5 each.

Financial performance snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 18254 17845 -2.2% 60558 66116 9.2%
Expenditure 13717 14778 7.7% 44710 54667 22.3%
Operating profit (EBITDA) 4,537 3,067 -32.4% 15847 11449 -27.8%
Operating profit margin (%) 24.9% 17.2%   26.2% 17.3%  
Other income 973 1594 63.8% 3617 5422 49.9%
Depreciation 1319 1232 -6.6% 4217 4666 10.6%
Interest 1 8   1 9  
Profit before tax 4190 3421 -18.3% 15247 12197 -20.0%
Tax 1138 1239 8.9% 4554 3483 -23.5%
Exceptional item   639     219  
Profit after tax/(loss) 3052 2821 -7.6% 10693 8495 -20.6%
Net profit margin (%) 16.7% 15.8%   17.7% 12.8%  
No. of shares (m)         2577.2  
Diluted earnings per share (Rs)*         3.3  
P/E ratio (x)*         18.2  
* On a trailing 12 months basis

What has driven performance in 4QFY12?
  • The company reported a 2.2% YoY decline in net sales despite higher realisations as compared to previous quarter. On a segmental basis, aluminium division revenues increased by 11% on a QoQ basis due to higher volumes. Alumina division revenue jumped 26.6% due to higher external sales. Revenue from power division too was strong at Rs 5.1 bn, higher by 7.2% QoQ due to higher availability of linkage coal. Revenues from chemical division jumped by 32% YoY.

    Cost break-up
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Raw Materials 3369 3374 0.2% 7760 10279 32.4%
    % of sales 18.5% 18.9%   12.8% 15.5%  
    Staff costs 3362 2556 -24.0% 9881 10345 4.7%
    % of sales 18.4% 14.3%   16.3% 15.6%  
    Power & fuel 4698 5089 8.3% 17789 21967 23.5%
    % of sales 25.7% 28.5%   29.4% 33.2%  
    Other Expenses 2289 3759 64.2% 9280 12076 30.1%
    % of sales 12.5% 21.1%   15.3% 18.3%  

  • Production of aluminium was higher on a QoQ basis to 104,000 tonne due to higher availability of linkage coal during the quarter. However, aluminium production was lower by 6% on a YoY basis as it continued to keep 120 pots idle. Alumina production too remained strong on the back of higher contribution from the new refinery. External alumina sales jumped 40.6% YoY to 274,000 tonne due to higher production and some previous quarter inventory liquidation.

  • Operating profits saw a decline of 32.4% YoY. Higher coal output from Coal India enabled negligible use of e-auctioned coal and this was the primary reason for a 11% QoQ drop in power and fuel expenses despite a 11% QoQ jump in aluminium production. Employee costs were down 24% YoY as previous quarter it had made provision for employee benefits. The impact of lower power costs was offset by a jump in other expenditure.

  • NALCO posted a multi-fold 380% and 451% QoQ jump in EBITDA and net profit, respectively, for the quarter on the back of lower fuel and power costs, employee costs, exceptional gains, higher other income and lower tax. On YoY basis, the company reported a 32% drop in EBITDA, but a 64% YoY surge in other income, thereby leading to net profit decline of only 8% YoY.

  • NALCO reported exceptional gains of Rs 639 m. A portion of this pertains to arrears in respect of performance related pay for executives and contribution to pension fund to the tune of Rs 1,410 m, which was partially offset by the write-back of a liability relating to disputed electricity duty to the extent of Rs 1,190 m.

What to expect?
NALCO faces risk on account of higher coal costs, uncertainty over global financial health and slower ramp up in alumina refinery. We reduce our volume estimates for FY12 and FY13 incorporating the management strategy of keeping aluminium smelter pots idle and slower ramp up in new refinery. However, we believe that the worst is over for the company and things should improve going forward. At the current price of Rs 57, Nalco is trading at 1.4 times our adjusted estimated book value. We maintain our positive view on the stock from a long term perspective.

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