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Nalco: Aluminum segment swings to profits - Views on News from Equitymaster
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Nalco: Aluminum segment swings to profits
Sep 3, 2014

Nalco has announced its results for the quarter ended June 2014. The company has reported a 7.7% YoY and 69.7% YoY growth in sales and net profits respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Topline of the company increased by 7.7% YoY.
  • At the operating level, the company reported an increase of 80.7% YoY due to lower costs and higher sales. Operating margins also improved to 16.5% during the quarter.
  • Net profits increased by 69.7% YoY. Apart from strong operational performance, fall in depreciation expenses by 23.3% YoY cushioned profits. The depreciation expenses were lower by Rs 400 m in 1QFY15 due to a change in the companies act.

Standalone financial snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 15,606 16,800 7.7%
Expenditure 14,075 14,036 -0.3%
Operating profit (EBDITA) 1,530 2,765 80.7%
Operating profit margin (%) 9.8% 16.5%  
Other income 1,787 1,904 6.5%
Interest (net) - - NA
Depreciation 1,245 955 -23.3%
Profit before tax 2,073 3,713 79.2%
Tax 476 1,004 111.0%
Profit after tax/(loss) 1,597 2,710 69.7%
Net profit margin (%) 10.2% 16.1%  
No. of shares (m)   2,577  
Diluted earnings per share (Rs)   1.1  
P/E ratio (x)*   19.9  
* On a trailing 12 months basis

What has driven performance in 1QFY15?
  • Net sales of the company increased by 7.7% YoY due to strong performance from the chemicals business (+12.7% YoY). However, revenues from the aluminum business were flat (-0.1% YoY) during the quarter.

  • Operating profits surged 80.7% YoY during the quarter. After almost 10-12 quarters, aluminum EBIT turned positive. Reduction in caustic soda prices and optimum utilization of coal improved the profitability of the alumina business. However, it may be noted that the alumina production was lower by about 20% in the quarter as blending bauxite was an issue due to problems in getting environmental clearance. Management expects that the profitability of the alumina business is sustainable. For the next quarter, profits of the aluminum segment are expected to go up by at least 10% odd. For the chemicals business, the profit growth is likely to be even higher.

  • PAT was up 69.7% YoY, imitating the operational performance. A 23.3% YoY fall in depreciation expenses amidst change in companies act further boosted profits.
What to expect?
At the current price of Rs 58, the stock is trading at a multiple of 20x its TTM earnings. Nalco’s earnings have remained extremely volatile in the past few quarters because of a sharp movement in power and fuel costs. However, in this quarter, power & fuel costs declined both sequentially as well as on a yearly basis. This coupled with reduction in prices of caustic soda turned the aluminum segment into profits after almost 10-12 quarters. What is further encouraging is the fact that the profitability of this segment is sustainable.

However, considering the volatility that raw material costs have witnessed in the past, we would like to wait for some time to indeed see the turnaround in the margin profile of the company. As a result, we maintain our SELL view on the stock.

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