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NALCO: Margins expansion likely - Views on News from Equitymaster
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NALCO: Margins expansion likely
Jun 12, 2009

We recently had a conference call with the management of Nalco to discuss about the performance of FY09 and the future plans of the company. Here are the key takeaways from the same. Key takeaways:

On FY09 performance: The topline grew by 1.9% YoY to Rs 52.3 bn during the fiscal on back of higher realizations of alumina and higher sales of aluminium. The alumina production grew marginally by 0.6% to 1,585,000 tonnes and that of aluminium grew by 1.4% to 365,500 tonnes. For the fiscal, alumina sales volume declined by 1.2% YoY to 850,000 tonnes, while aluminium sales volume grew by 3.6% YoY to 365,000 tonnes. Power production grew by 1.9% YoY to 5,714 m units and sales of the same stood at 229 m units, showing an increase of 77.5% YoY in FY10. Revenues from exports contributed around 37% to the topline, showing a decline of 3%YoY, while the same from domestic markets accounted for 63% of total sales, registering a growth of 3.5% YoY during the fiscal. The average cost of production (inclusive of interest charges for internal funds) of alumina and aluminium stood at Rs 9,359 per tonne and Rs 88,411 per tonne respectively. The operating margins declined by 10.5% to 34.5% during the fiscal mainly on account of higher power & fuel costs and staff expenses. Bottomline declined by 22% YoY to Rs 12.7 bn.

Balance sheet position: Nalco continued to maintain its debt free status with no debt outstanding on its balance sheet. The liquidity position of company remains strong as its sits on a cash balance of Rs 28.7 bn. It also plans to continue to fund the entire working capital requirement as well as capex through internal accruals going forward.

Expansion plans: The company plans to expand its alumina capacity to 2.1 m tonnes and aluminium capacity to 460,000 tonnes by July- August 2010. For this purpose, the company did a capex of around Rs 13 bn in FY09 and intends to spend another Rs 12 bn in FY10.

On Indonesia and AP projects: The company’s Indonesian project wherein it intends to set up mega greenfield smelter and thermal power plant is in advanced stages. It has been assured of coal linkages for a period of 30 years there. The company is awaiting government clearance for land acquisition for its Andhra Pradesh project. Further clarity about the progress of both the projects is expected to come by end of FY10.

Guidance for FY10: The company has set production targets of alumina at 1.86 m tonnes, aluminium at 460,000 tonnes and power at 7,200 m units during FY10. The management intends to sell all the alumina and aluminium it produces wherein spot sales are expected to be maintained at around 40% to 45% in FY10. The management expects the margins to improve during the fiscal as the operating costs are likely to come down by around 5% to 10% during FY10. This is mainly on account of significant fall in the prices of raw materials.

What to expect?
At the current price of Rs 367, the stock trades at a P/BV of 1.8x times our expected FY11 book value per share. We will shortly update the report of the company with our revised projections.

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