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Nalco: Exceptional gain boosts profits - Views on News from Equitymaster
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Nalco: Exceptional gain boosts profits
Jun 30, 2015

Nalco has announced its results for the quarter ended March 2015. The company has reported a 2.0% YoY decline in revenues. However, profits have grown by 105.8% YoY. Here is our analysis of the results:-

Performance summary
  • Topline of the company declined by 2.0% YoY.
  • At the operating level, the company reported an increase in profits of 38.4% YoY as expenditure declined 10.2% YoY. As a result of fall in expenditure, operating margins increased to 23.8% in 4QFY15 from 16.8% in 4QFY14.
  • Net profits increased by 105.8% YoY due to strong performance at the operating level and exceptional gain of Rs 1,484.2 m arising from an out of court settlement with government of Odisha pertaining to claims on disputed electricity duty, interest on that duty and duty on transmission and transformation (T&T) loss. Basically, the out of court settlement resulted in write backs which increased the profits. Adjusting for exceptional items, profits declined 6.9% YoY.
  • The board has recommended a final dividend of Rs 0.5 per equity share.

Financial performance snapshot
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Net sales 18,382 18,013 -2.0% 67,809 73,828 8.9%
Expenditure 15,290 13,732 -10.2% 58,467 56,768 -2.9%
Operating profit (EBDITA) 3,092 4,280 38.4% 9,342 17,060 82.6%
Operating profit margin (%) 16.8% 23.8%   13.8% 23.1%  
Other income 1,354 1,621 19.7% 5,577 6,726 20.6%
Interest (net) - - NA - - NA
Depreciation 1,409 979 -30.5% 5,247 4,137 -21.2%
Profit before tax 3,037 4,922 62.1% 9,672 19,650 103.2%
Exceptional items  494 (1,484) NM 494 (1,484) NM
Tax 819 2,857 249.1% 2,755 7,916 187.4%
Profit after tax/(loss) 1,725 3,549 105.8% 6,424 13,219 105.8%
Net profit margin (%) 9.4% 19.7%   9.5% 17.9%  
No. of shares (m)         2,577  
Diluted earnings per share (Rs)         5.1  
P/E ratio (x)*         7.8  
* On a trailing 12 months basis

What has driven performance in 4QFY15
  • Net sales of the company declined by 2% YoY. The company produced 5,739,120 MT of Bauxite in FY15. The production figures for Alumina and Metal stood at 1,851,000 MT and 327,070 MT respectively at the end of the fiscal. The total metal (domestic + export) sales stood at 326,079 MT at the end of FY15.

  • Operating profits increased 38.4% YoY during the quarter as power & material cost fell 10.1% YoY and 12.2% YoY respectively. Nonetheless, employee expenses increased 22.9% YoY curbing the operating profit growth to an extent. Operating margins stood at 23.8% in 4QFY15 compared to 16.8% in 4QFY14.

  • PAT was up 105.8% YoY, imitating strong operational performance. The growth was further boosted by exceptional gains of Rs 1,484.2 m.
What to expect?

At the current price of Rs 40, the stock is trading at a multiple of 7.8x its TTM earnings. Nalco's earnings shot up significantly during the quarter due to exceptional gains. However, adjusting for these exceptional gains, profits declined 6.9% YoY along with a 2.0% YoY decline in revenue growth. In order to restore growth, the company has undertaken various Greenfield and Brownfield expansion plans. For instance, it has planned a JV with GMDC for an alumina refinery plant at Gujarat. It also plans to set up a caustic soda plant in JV with GACL in the same state. While the company is undertaking feasibility studies for these projects at the moment, once they come on ground, the growth plans will get a major boost. Nonetheless, inadequate coal linkages could turn out to be dampening factor as far as meeting its raw material requirements is concerned. We maintain our SELL view on the stock.

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