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Nalco: Lower prices sink profits - Views on News from Equitymaster
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Nalco: Lower prices sink profits
Aug 24, 2012

Nalco has announced its results for the quarter ended June 2012. The company has reported a decline of 0.8% YoY in net sales and 40.8% YoY in net profits respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Topline of the company remained flat due to lower aluminium LME prices.
  • Operating profits declined by 50.7% YoY during the quarter owing to higher expenditure. EBITDA margins declined by 17.6% YoY.
  • Net profits decreased by 40.8% YoY. Net profit margins declined by 8.6% YoY.

(Rs m) 1QFY12 1QFY13 Change
Sales 17625 17481 -0.8%
Expenditure 11459 14439 26.0%
Operating profit (EBITDA) 6,166 3,042 -50.7%
Operating profit margin (%) 35.0% 17.4%  
Other income 1254 1403 11.9%
Depreciation 1019 1224 20.0%
Interest 0 32  
Profit before tax 6401 3190 -50.2%
Tax 1776 959 -46.0%
Exceptional item 858    
Profit after tax/(loss) 3767 2230 -40.8%
Net profit margin (%) 21.4% 12.8%  
No. of shares (m)   2577.2  
Diluted earnings per share (Rs)*   2.7  
P/E ratio (x)*   19.6  

What has driven performance in 1QFY13?
  • Net sales of the company remained flat. Revenues from aluminium division were down by 7.9% YoY. Revenues from power division were up by 7.7% YoY and revenues from chemical division were down by 17.6% YoY. During the quarter, revenue contribution from aluminium declined to 49.5% as against 54.7% in 1QFY12. Alumina sales volumes grew by 38.3% YoY to 253 kt while aluminium sales volumes decreased by 5.5% YoY to 103 kt. LME aluminium price in rupee terms corrected by 8% YoY during 1QFY13. Though aluminium LME price declined 24% YoY, rupee depreciation against the USD and better regional premium substantially cushioned this decline.

  • NALCO reported 17% YoY and 11% QoQ rise in alumina EBIT, largely driven by higher volume from a newly commissioned facility. The aluminium segment reported EBIT loss of Rs 1,913 m, which is a sequential deterioration from the loss of Rs 1,647 m in 4QFY12, due to lower realization and increased power costs. Power segment reported a drop of 26% QoQ in EBIT despite stable revenue, which implies higher coal costs on sequential basis although, it remained stable on YoY basis with a 5% increase.

  • Operating profits saw a decline of 50.7% YoY. This was due to high cost of raw materials. Raw material costs as a percentage of net sales stood at 14.3%, compared to 10.3% in 1QFY12. Amongst key inputs, prices of caustic soda, CP coke, CP pitch and aluminium fluoride increased substantially. Further, power costs as a percentage of net sales stood at 35.2%, compared to 27.7% in 1QFY12. The increase in power costs was due to the lower availability of linkage coal, As a result operating margins declined by 17.6% YoY.

    Cost break-up
    (Rs m) 1QFY12 1QFY13 Change
    Raw Materials 1548 2462 59.0%
    % of sales 8.8% 14.1%  
    Staff costs 2465 2835 15.0%
    % of sales 14.0% 16.2%  
    Power & fuel 4808 6046 25.8%
    % of sales 27.3% 34.6%  
    Other Expenses 2639 3096 17.3%
    % of sales 15.0% 17.7%  

  • Nalco posted a decline of 40.8% YoY in net profits. Lower aluminium prices coupled with higher expenditure led to decline in net profit. Net profit margin also declined by 8.6% YoY. However other income increased by 11.9% YoY.

What to expect?
Nalco had received compliance letter for its Utkal coal block during September 2011. However, there is lack of clarity on the completion of other regulatory formalities in the near term. Hence, production from this block is unlikely to start in FY13 in our view. We continue to believe that Nalco's long position in alumina will aid earnings driven by higher spot alumina prices globally.

At the current price of Rs 53, Nalco is trading at 1.5 times our estimated FY15 book value. We maintain our positive view on the stock from a long term perspective.

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