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Nalco: Cyclical ride

Jul 28, 2004

Introduction to results
National Aluminum Corporation (Nalco), the largest alumina producer and second largest producer of primary aluminum in the country, has reported impressive topline and bottomline performance for the first quarter of FY05. The company continues to benefit from the strength currently witnessed in the aluminium cycle.

(Rs m) 1QFY04 1QFY05 % Change
Net Sales 6,202 8,223 32.6%
Other Income 532 417 -21.7%
Expenditure 3,743 3,787 1.2%
Operating Profit (EBDIT) 2,459 4,436 80.4%
Operating Profit Margin (%) 39.7% 54.0%  
Interest 276 225 -18.6%
Depreciation 1,027 1,131 10.1%
Profit before Tax 1,689 3,498 107.1%
Tax 506 1,308 158.7%
Profit after Tax/(Loss) 1,183 2,190 85.1%
Net profit margin (%) 19.1% 26.6%  
No. of Shares (m) 644 644  
Diluted Earnings per share* 7.3 13.6  
P/E Ratio   10.7  
(* annualised)      

India's largest alumina producer
Nalco is the largest alumina producer and is next only to Hindalco in production of primary aluminum in the country. The company is amongst the lowest cost producers of the base metal in the world. It has a competitive edge vis-a-vis its peers due to factors like captive power plants and rich bauxite reserves. The company derives more than 50% of its revenues from exports.

Pricing strength led growth
Sales: Nalco's topline has registered an impressive YoY growth of 33% during the quarter. While the detailed numbers have not been provided by the company as yet, considering that the production of both, aluminium and alumina, have registered a marginal growth of 1% YoY in the quarter, the increase in volume sales wouldn't be much. Thus, this implies that significantly higher realisations, thanks to the strong global metal and alumina prices, led to the company's strong topline performance. It must be noted that average aluminium prices during the quarter were higher by nearly 22% as compared to the same quarter last year.

Operating margins: The operating margins of the company leapfrogged by over 1,400 basis points (14%). Since commodity players (in this case Nalco) have a high operating leverage, any significant improvement in realisations flows directly to the bottomline. Further, the operating expenditure has increased by a mere 1% YoY. This was a factor of a reduction in the consumption of raw materials as a percentage of net sales and also the control over other manufacturing expenses, administrative, selling and distribution costs (see table below).

Cost break-up (% of net sales)
1QFY04 1QFY05
Inc/Dec in stock in trade -9.1% -5.5%
Raw material consumed 16.3% 10.4%
Power & Fuel 25.9% 20.5%
Repairs & maintenance 5.5% 4.5%
Other Mfg. Expenses 5.5% 3.7%
Staff costs 10.0% 7.9%
Administration expenses 3.6% 2.6%
Selling & distribution exp. 2.6% 1.8%
Total expenses 60.3% 46.0%

Net profits: The company's bottomline has surged by a huge 85% during the quarter, owing to the trickle down effect from operating levels, with net profit margins improving by 770 basis points. Further, the bottomline has managed this impressive growth despite the significantly higher tax provision (up 159% YoY).

What to expect?
As far as the company's expansion plans are concerned, it has already received the government go-ahead to increase its capacity. Nalco's expansion plan entails the expansion of its mining capacity from the present level of 4.8 m tonnes to 6.3 m tonnes, the capacity of its refinery at Dhamanjodi from 1.6 m tonnes to 2.1 m tonnes, aluminium capacity from the current 345,000 tonnes to 460,000 tonnes and power generation capacity from 960 MW to 1,200 MW. The company intends to meet this cost of expansion (Rs 40 bn) largely out of internal accruals and to an extent from commercial borrowings. This capacity is likely to come on stream only during FY09.

At Rs 146, the stock is trading at a P/E multiple of 10.7x its annualised 1QFY05 earnings, which is at the higher side of its valuation spectrum. Going forward, while we believe that the near-term outlook for the sector continues to remain firm, we remain skeptical of the company's ability to sustain the high growth momentum in the medium-term, mainly owing to our concerns with respect to the cyclicality of the sector in terms of alumina and aluminium prices.

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Dec 3, 2021 (Close)