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Nalco: Riding the cycle

Oct 10, 2003

National Aluminum Corporation (Nalco), the largest alumina producer and second largest producer of primary aluminum in the country, has posted impressive results for the second quarter ended September 2003. The company is a strong player in the aluminium business with fully integrated operations from mining to smelting aided by captive power. Consequently, it is amongst the lowest cost aluminium producers in the world.

(Rs m) 2QFY03 2QFY04 Change
Net Sales 5,962 8,075 35.4%
Other Income 386 503 30.3%
Expenditure 3,465 4,633 33.7%
Operating Profit (EBDIT) 2,497 3,442 37.8%
Operating Profit Margin (%) 41.9% 42.6%  
Interest 295 248 -15.8%
Depreciation 877 1,044 19.1%
Profit before Tax 1,712 2,653 54.9%
Tax 526 781 48.4%
Profit after Tax/(Loss) 1,186 1,872 57.8%
Net profit margin (%) 19.9% 23.2%  
No. of Shares (m) 644 644  
Diluted Earnings per share* 7.4 11.6  
P/E Ratio   12  

The company has registered a strong growth of 58% in its bottomline on the back of a 35% topline growth. While there are no figures available as yet on the sales volumes front, it must be noted that for the September 2003 quarter, while the company’s aluminium production increased by 27%, its production pf alumina actually declined by 2%. However, it is the prices that have been lending a helping hand to the aluminium industry. While alumina prices continue to rule strong after nearly doubling since last year (around US$ 300 per tonne), average aluminium prices have also showed a marked improvement (up 10%) for 2QFY04 over that of the corresponding period last year.

Cost break-up (% of net sales)
(Rs m) 2QFY03 2QFY04
Raw material consumed 14.1% 13.5%
Power & Fuel 23.2% 19.5%
Repairs & maintenance 4.4% 5.1%
Other Mfg. Expenses 3.2% 1.9%
Staff costs 10.4% 7.7%
Administration expenses 3.4% 2.7%
Selling & distribution exp. 2.6% 2.3%
Total expenses 61.3% 52.6%

The company has been able to manage its operating costs well, which helped it to improve operating margins by 70 basis points. As can be seen in the table above, significant savings in power & fuel costs, staff costs and administrative and selling expenses aided the company’s bottomline growth. These cost controls was followed by a 16% decline in interest outgo. On the other hand, the rise in depreciation could be attributed to the capacity expansion that the company has embarked on.

With majority of the revenue being generated from the upstream business, the company's financials are susceptible to cyclicality. And realizing this fact, the company has taken steps to venture into the downstream business. Since the downstream/value added products tend to realise higher margins, it could help the company to protect its margins to a certain extent and smoothen the effect of any cyclical downturn. It must be noted that the company has commissioned a 10,000 tonnes per annum (TPA) detergent grade zeolite plant at Orissa (same location of alumina refinery). Although costlier, zeolite internationally is a preferred raw material in making detergents. The company’s commissioning of the 50,000 tonnes cold rolled mill will also help propel value and volume growth for the company.

At Rs 142, the stock is trading at a P/E multiple of over 12x its 2QFY04 annualised earnings. With the stock trading in the P/E band of 6x-12x its earnings in the last four years, the current valuations are on the higher end of the spectrum. Since the last couple of years, the stock has been commanding a premium over its peers owing to the fact the company was one of the candidates to be divested in the current fiscal. However, with the political juggle and the upcoming elections spreading its wings, the divestment of the company has been postponed until after elections to be held in 2004. Moreover, the alumina and aluminium prices are currently ruling at significantly high levels owing to strong consumption by China. However, we feel that prices are unlikely to move up further substantially from the current levels.

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