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Nalco: Realisation gains

Aug 5, 2003

National Aluminum Corporation Ltd. (Nalco), the largest alumina producer and second largest producer of primary aluminum in the country, announced its 1QFY04 results recently. The company, being an integrated player, is one of the lowest cost producers of the metal in the world. On the June quarter results front, the company posted a 19% bottomline growth on the back of a 3% topline growth. The operating margins also showed an improvement by 200 basis points.

(Rs m) 1QFY03 1QFY04 Change
Net Sales 6,002 6,202 3.3%
Other Income 412 532 29.3%
Expenditure 3,739 3,743 0.1%
Operating Profit (EBDIT) 2,262 2,459 8.7%
Operating Profit Margin (%) 37.7% 39.7%  
Interest 322 276 -14.2%
Depreciation 889 1,027 15.5%
Profit before Tax 1,464 1,689 15.4%
Tax 472 506 7.1%
Profit after Tax/(Loss) 991 1,183 19.4%
Net profit margin (%) 16.5% 19.1%  
No. of Shares (m) 644 644  
Diluted Earnings per share* 6 7  
P/E Ratio   14  

The company’s topline is a factor of two business segments. One is the chemicals segment, which includes alumina, while the other is the aluminium segment. The chemicals segment reported a dismal performance considering the fact that the revenues from the segment declined by 10% as compared to the aluminium segment, which registered a growth of 16%.

Production breakup
  1QFY03 1QFY04 Change
Calcined Alumina (MT) 358,600 369,100 2.9%
Aluminium Metal (MT) 57,129 72,847 27.5%
Electricity (Metric Units) 1,042 1,235 18.5%

The chemicals segment was partially affected by the lower demand for alumina in international markets, as one of the key consumers in recent times, China, slowed its consumption due to the outbreak of SARS in the country. This also led to some pressure on the realisations of the company. On the other hand, the growth in the aluminium segment stems not only from the fact that production and consequently sales of the metal was higher during the June quarter, but also, average prices of the metal have shown an improvement YoY from US$ 1,350 levels to US$ 1,380 levels. The company seems to have benefited from the same.

Cost break-up (% of net sales)
(Rs m) 1QFY03 1QFY04
Raw material consumed 16.2% 16.3%
Power & Fuel 22.1% 25.9%
Repairs & maintenance 5.7% 5.5%
Other Mfg. Expenses 3.1% 5.5%
Staff costs 10.0% 10.0%
Administration expenses 3.0% 3.6%
Selling & distribution exp. 2.7% 2.6%
Total expenses 62.7% 69.4%

The company has reported a marginal increase on the expenditure front. It must be noted that this includes the change of stock in progress. However, just to put a different perspective to the expenses of the company, if for a moment the stock in progress component is excluded from total expenses, the picture is as shown in the table above. While the company has managed to keep a check on the raw material consumption, power and fuel and administration costs have shown an increase as a percentage to net sales. Overall, the total expenses (excluding change of stock in progress) as a percentage of net sales have increased from 63% to 69%. The change of stock in progress managed to save the operating margins of the company.

On the interest front, the company managed to reduce its interest outgo by 14%. This is a factor of the advantage taken by the company of the low interest rates prevailing in the economy. However, depreciation increased by 16%, partly of which could be attributed to the completion of the expansion of the company’s aluminium and alumina capacities.

At Rs 108, the company is trading on a P/E multiple of 14x 1QFY04 annualised earnings. The valuations are on the higher end of the spectrum. Nalco’s compatriot, Hindalco, currently trades at 9.8x annualised 1QFY04 earnings. The higher valuations for Nalco are owing to divestment hopes. However, now that the government has categorically stated and called off the divestment process of the company, investors must exercise caution. Though the divestment of the company should go through, the process has taken a back seat for now. This is owing to protests by employee unions and more importantly, the government doesn’t seem interested in taking any risk as elections draw closer. The volume growth of the company hinges on economic growth, domestic and international, as exports constitute a large component of its revenues. However, the cause of concern would be the currently high alumina and aluminium prices, which could show some correction.

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