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Nalco: A subdued quarter - Views on News from Equitymaster
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Nalco: A subdued quarter
Jul 8, 2014

Nalco has announced its results for the quarter ended March 2014. The company has reported a decline of 1.6% YoY and 29.9% YoY in sales and net profits respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Topline of the company decreased by 1.6% YoY
  • At the operating level, the company reported a decline of 26.7% YoY in profits due to increase in staff costs and other expenses. However, raw material and power expenses declined on YoY basis thereby supporting operating profitability growth to an extent.
  • Net profits declined by 29.9% YoY due to poor performance at the operating level. Net profit margins stood at 9.4% in 4QFY14 as compared to 13.2% in 4QFY13.
  • For the full year ended March 2014, net sales declined by 2% YoY while net profits increased by 8.4% YoY.
  • The board has recommended a final dividend of Rs 0.4 per share.

Financial performance snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales  18,673 18,382 -1.6% 69,165  67,809 -2.0%
Expenditure  14,456 15,290 5.8% 60,096  58,467 -2.7%
Operating profit (EBDITA) 4,216 3,092 -26.7% 9,069 9,342 3.0%
Operating profit margin (%) 22.6% 16.8%   13.1% 13.8%  
Other income 1,190 1,354 13.8% 5,111 5,577 9.1%
Interest (net) - - NA 75 - -100.0%
Depreciation 1,361 1,409 3.6% 5,054 5,247 3.8%
Profit before tax 4,046 3,037 -24.9% 9,050 9,672 6.9%
Exceptional Item - 494 NM - 494 NM
Tax 1,585 819 -48.4% 3,122 2,755 -11.8%
Profit after tax/(loss) 2,460 1,725 -29.9% 5,928 6,424 8.4%
Net profit margin (%) 13.2% 9.4%   8.6% 9.5%  
No. of shares (m)         2,578  
Diluted earnings per share (Rs)         2.5  
P/E ratio (x)*         22.1  

What has driven performance in 4QFY14?
  • Net sales of the company declined by 1.6% YoY. Its alumina production volumes increased to 499,500 metric tonne (MT) in 4QFY14 as compared to 465,500 MT in 3QFY14. However, the aluminium production volumes were flat on a QoQ basis and stood at 78,579 MT.

  • Aluminium EBIT continued to remain in negative trajectory at Rs 705 m following subdued prices (out of the past 11 quarters, aluminium EBIT was negative in 10 quarters). Nalco posted a 16.3% YoY fall in aluminium revenue at Rs 10,769.1 m, while the same was up 1.2% on QoQ basis. The Chemical segment registered a 13.7% YoY growth in sales.

  • Total Alumina sales stood at 373,250 MT while aluminium sales stood at 80,676 MT in 4QFY14. The average realization for exported alumina was US$320/t (Rs 19,689/t) while the same for exported metal was US$1,979/t (Rs 121,767/t) for the quarter.

    Cost break-up
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Raw Materials 2,960 2,884 -2.6% 11,678 10,632 -9.0%
    % of sales 15.9% 15.7%   16.9% 15.7%  
    Staff costs 2,854 2,986 4.6% 11,539 12,453 7.9%
    % of sales 15.3% 16.2%   16.7% 18.4%  
    Power & fuel 4,889 4,785 -2.1% 24,323 20,177 -17.0%
    % of sales 26.2% 26.0%   35.2% 29.8%  
    Other Expenses 3661.9 3992.6 9.0% 13198 14619 10.8%
    % of sales 19.6% 21.7%   19.1% 21.6%  

  • PAT was down 29.9% YoY, imitating EBITDA performance. For FY14, the company posted 3% YoY and 8.4% YoY jump in EBITDA and PAT, respectively.
What to expect?
Nalco's earnings have remained extremely volatile in the past few quarters because of a sharp movement in power and fuel costs. Alumina production, the key driver of earnings, which was expected to bounce back at full capacity in 4QFY14 indeed showed improvement but the overall cost of sales were higher, leading to fall in profits and margins. Going forward, the aluminum segment too is expected to turn around with stronger spot premiums and stable LME at around an average of USD $1,800/t.

At the current price of Rs 54, the stock is trading at a multiple of 22.1 times its trailing twelve month earnings. We are likely to revise our estimates and target price based on FY17 projections soon. Until then we maintain our Hold view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single large cap stock comprises more than 5% of your portfolio

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