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NALCO: The margin dampener - Views on News from Equitymaster

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NALCO: The margin dampener

Aug 1, 2008

Performance summary
  • Topline of the company grew by 26% on a YoY basis, led by higher volumes.
  • Operating profit margins declined by 270 bps mainly on account of higher raw material prices and increase in staff costs.
  • Net profit growth came 18% on a YoY basis, lower than the topline and operating profit growth mainly due to decline in other income.

(Rs m) 1QFY08 1QFY09 Change
Net sales 11,652 14,675 25.9%
Expenditure 5,488 7,307 33.1%
Operating profit (EBDITA) 6,164 7,368 19.5%
EBDITA margin (%) 52.9% 50.2%  
Other income 1,310 1,262 -3.7%
Interest (net) 1 4 300.0%
Depreciation 692 679 -1.9%
Profit before tax 6,782 7,948 17.2%
Extraordinary income/(expense) -    
Tax 2,315 2,694 16.4%
Profit after tax/(loss) 4,467 5,253 17.6%
Net profit margin (%) 38.3% 35.8%  
No. of shares (m) 644.3 644.3  
Diluted earnings per share (Rs)   26.5  
Price to earnings ratio (x)**   16.2  

What has driven performance in 1QFY09?
  • While the company’s volumes for both alumina and aluminium grew at a slower pace, the hefty growth in realisations more than made up for it and enabled the topline to grow by a strong 26% YoY. As per the management, while prices of alumina ruled higher by more than 40% YoY, realisations for the metal came in higher by 17% YoY. It should be noted that tight demand supply situation, increased prices of fuel and freight and price inflation in other inputs has led to worldwide buoyancy in prices of both alumina as well as aluminium and this has also benefited Nalco. Furthermore, the rupee’s depreciation against the dollar must have also helped a big exporter like Nalco in growing its revenues.

    cost break up
    (Rs m) 1QFY08 1QFY09 Change
    Raw materials 777 1,190 53.1%
    % sales 6.7% 8.1%  
    Staff cost 1,068 1,530 43.3%
    % sales 9.2% 10.4%  
    Power and fuel 2,142 2,725 27.2%
    % sales 18.4% 18.6%  
    Other expenses 1,501 1,861 24.0%
    % sales 12.9% 12.7%  

  • Company’s operating margins have suffered a fall of 270 basis points in the quarter under consideration. The company has been facing severe cost pressures especially on the raw materials side and as a consequence, raw materials costs have increased by 140 basis points as a percentage of sales. Furthermore, higher provisioning has also seen its staff costs increase by a significant 43% YoY and 120 basis points as a percentage of sales. These two factors have combined together to pull down the operating margins of the company and restrict its operating profit growth to 20% YoY.

  • With the company using surplus funds towards capacity expansion, other income has come in lower by 4%. But the same has been compensated by a small drop in depreciation charges, thus preventing any further dip in bottomline and enabling it to grow by 18% YoY during 1QFY09.

What to expect?
At the current price of Rs. 425, the stock is trading at a price to book value multiple of nearly 2 times its expected FY11 book value per share. This makes the stock fairly valued from a medium term perspective. However, if the cost pressures persist, there is a risk of the target price coming downwards as we will have to factor the same into our projections.

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Mar 26, 2019 (Close)