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Nalco: Higher operating costs spoil show. - Views on News from Equitymaster

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Nalco: Higher operating costs spoil show.
Jun 4, 2009

Performance summary
  • Topline grew by 1.9% YoY in FY09 led by higher sales of alumina and electricity.
  • Huge contraction in operating margins to the tune of 10.5% has led to a 22% YoY fall in operating profits during the fiscal.
  • Bottomline for the full year has declined by 22% YoY mainly on account of lower operating profits.
  • Bottomline for the fourth quarter has plunged 81.4% YoY on the back of a 6.2% fall in topline.
  • Has recommended a total dividend of Rs 5, of which Rs 3.5 has already been paid as interim dividend for FY09.


(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 12,004 11,257 -6.2% 51,347 52,308 1.9%
Expenditure 5,488 10,301 87.7% 28,221 34,268 21.4%
Operating profit (EBDITA) 6,516 956 -85.3% 23,125 18,040 -22.0%
EBDITA margin (%) 54.3% 8.5%   45.0% 34.5%  
Other income 958 1,078 12.5% 4,410 4,001 -9.3%
Interest (net) 1 29   15 40 160.5%
Depreciation 692 713 3.1% 2,854 2,730 -4.4%
Profit before tax 6,782 1,292 -81.0% 24,666 19,272 -21.9%
Tax 2,315 462 -80.1% 8,351 6,549 -21.6%
Profit after tax/(loss) 4,467 830 -81.4% 16,315 12,723 -22.0%
Net profit margin (%) 37.2% 7.4%   31.8% 24.3%  
No. of shares (m)       644.3 644.3  
Diluted earnings per share (Rs)*       25.3 19.7  
Price to earnings ratio (x)**         17.3  
* annualised, ** on trailing twelve months earnings

What has driven performance in FY09?
  • The topline of the company grew by 1.9% YoY mainly on account of increase in the revenues from the alumina and electricity segments of the company. The revenues from the sale of alumina grew by 20.4% YoY, while the same from sale of electricity grew by 20.9% during the fiscal. However, the revenues from the aluminium segment registered a decline of 2.1%. This is presumably on account of lower realizations due to the weak LME prices of aluminium during the second half of the fiscal. In fact, as per CMIE, average LME prices of aluminium had declined by around 56% YoY during the fiscal.

  • As far as operating performance is concerned, the margins declined by 10.5% to 34.5% during the fiscal mainly on account of higher power & fuel costs and staff expenses. Power & fuel costs (as % of sales) increased from 19.4% in FY08 to 25.1% in FY09, while staff costs (as % sales) increased from 11.7% in FY08 to 14.7% in FY09. Increase in staff costs can be attributed to the implementation of sixth pay commission.

    Cost break up
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Raw materials 777 2,868 268.9% 5,525 6,114 10.7%
    % sales 6.5% 25.5%   10.8% 11.7%
    Power and fuel 2,142 2,777 29.7% 9,947 13,116 31.9
    % sales 17.8% 24.7%   19.4% 25.1%
    Staff cost 1,068 2,774 159.7% 5,704 7,711 35.2
    % sales 8.9% 24.6%   11.1% 14.7%
    Other expenditure 1,501 1,881 25.3% 7,045 7,328 4.0%
    % sales 12.5% 16.7%   13.7% 14.0%

  • The bottomline fall at 22% YoY is in line with the operating level performance during the fiscal. The other income declined by 9.3% YoY while interest expenses grew by 160.5%. The depreciation charges declined by 4.4% during the fiscal.

What to expect?
At the current price of Rs 341, the stock is trading at a multiple of 1.8 times its estimated FY11 book value. The performance of the company has come in lower than our estimates. The bottomline has come 25% lower than our projections. We will revise our projections after the concall with the company which is likely to be scheduled soon.

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