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NALCO: Not looking good

Jul 31, 2007

Performance summary
  • Topline falls by 22% YoY, seemingly hurt by rising rupee.

  • A huge 1,000 basis points drop in operating margins leads to 34% YoY fall in operating profits

  • PAT shrinks 28% YoY, lower than the drop in operating profits, largely due to 57% growth in other income and fall in depreciation charges

(Rs m) 1QFY07 1QFY08 Change
Net sales 14,855 11,652 -21.6%
Expenditure 5,512 5,488 -0.4%
Operating profit (EBDITA) 9,344 6,164 -34.0%
EBDITA margin (%) 62.9% 52.9%  
Other income 834 1,310 57.1%
Interest (net) - (1)  
Depreciation 787 692 -12.1%
Profit before tax 9,391 6,782 -27.8%
Extraordinary income/(expense) - -  
Tax 3,168 2,315 -26.9%
Profit after tax/(loss) 6,223 4,467 -28.2%
Net profit margin (%) 41.9% 38.3%  
No. of shares (m) 644.3 644.3  
Diluted earnings per share (Rs)* 38.6 27.7  
Price to earnings ratio (x)**   7.6  

What is the company’s business?
Nalco is the largest alumina and second largest aluminium producer in India. Nalco is Asia's largest integrated aluminium complex, encompassing bauxite mining, alumina refining, aluminium smelting and casting, power generation, rail and port operations. The company is amongst the lowest cost producers of the base metal in the world. It has a competitive edge vis-ŕ-vis its peers due to factors like rich bauxite reserves, captive power plants and rail and port operations. The company derives more than 50% of its revenues from exports. The company does not incur interest cost as it being a zero debt company.

What has driven performance in 1QFY08?
Particulars 1QFY07 1QFY08 change
Alumina (MT) 358,100 387,800 8.3%
Aluminium (MT) 88,584 86,712 -2.1%
Electricity (m units) 1,461 1,449 -0.8%
Woes at the top: The company produced 8% more alumina than it managed same quarter last year. Production of aluminium and power though were down 2% and 1% YoY respectively. Although production growth in alumina is heartening and should have accounted for better topline growth, the 22% YoY fall in revenues is seemingly a consequence of rising rupee. With exports forming more than 50% of the company’s revenues, a 9% YoY appreciation in rupee versus the dollar during the quarter hurt revenues. Further, with metal prices not rising appreciably, there was nothing that could offset this rupee appreciation and hence, the fall in the company’s topline.

Barring raw material costs, which have fallen more than the topline, all the other cost heads have registered YoY increases against a backdrop of falling revenues. Not surprisingly then, operating margins have suffered and have taken a hit of a huge 1,000 basis points. The biggest impact has come from the staff costs, which have witnessed a huge 24% YoY jump. Power and fuel costs and other expenses have also exerted a downward pressure on margins.

Cost break-up…
(Rs m) 1QFY07 1QFY08 Change
Raw materials 1,060 777 -26.7%
% sales 7.1% 6.7%
Staff cost 862 1,068 23.9%
% sales 5.8% 9.2%
Power and fuel 2,138 2,142 0.2%
% sales 14.4% 18.4%
Other expenses 1,451 1,501 3.5%
% sales 9.8% 12.9%

In recent quarters
As seen from the table below, rising rupee and inflation have been hurting the margins of the company. Further, with metal prices not moving as sharply as in the past, companies like NALCO have no option but to absorb the rising costs internally.

over the last few quarters
  1QFY07 2QFY07 3QFY07 4QFY07 1QFY08
Net sales (YoY growth %) 51.8% 37.7% 9.3% 1.9% -21.6%
OPM 62.9% 60.7% 58.3% 56.2% 52.9%
NPM 41.9% 41.3% 39.5% 37.7% 38.3%

What to expect?
At the current price of Rs 261, the stock is trading at a multiple of 7.6 times its trailing twelve-month earnings. We are in the process of updating our research report on the company and will soon come out with our forward estimates for the same.

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Aug 12, 2020 03:07 PM