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Nalco: The ride continues… - Views on News from Equitymaster
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  • Oct 28, 2004

    Nalco: The ride continues…

    Introduction to results
    National Aluminum Corporation (Nalco), the largest alumina producer and second largest producer of primary aluminum in the country, has continued its impressive performance. For the quarter ended September 2004 (2QFY05), the company has declared a topline growth of 21%, while its bottomline has registered an equally handsome growth of 47%. The company continues to benefit from the sustained strength in the aluminium cycle.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net Sales 8,075 9,769 21.0% 14,277 17,992 26.0%
    Expenditure 4,633 4,657 0.5% 8,376 8,444 0.8%
    Operating Profit (EBDITA) 3,442 5,112 48.5% 5,901 9,548 61.8%
    EBITDA margin (%) 42.6% 52.3%   41.3% 53.1%  
    Other income 503 589 17.0% 1,036 1,006 -2.9%
    Interest 248 173 -30.3% 524 398 -24.1%
    Depreciation 1,044 1,135 8.7% 2,071 2,266 9.4%
    Profit before tax 2,653 4,393 65.6% 4,342 7,891 81.7%
    Tax 781 1,638 109.7% 1,286 2,945 129.0%
    Profit after Tax/(Loss) 1,872 2,755 47.2% 3,055 4,945 61.9%
    Net profit margin (%) 23.2% 28.2%   21.4% 27.5%  
    No. of Shares (m) 644 644   644 644  
    Diluted earnings per share* 11.6 17.1   9.5 15.4  
    Price to earnings ratio (x)   10.2     11.3  
    (* annualised)            

    India’s largest alumina producer
    Nalco is the largest alumina producer in the country and is next only to Hindalco in the production of primary aluminum. The company is amongst the lowest cost producers of the base metal in the world. It has a competitive edge vis-ŕ-vis its peers due to factors like captive power plants and rich bauxite reserves. The company derives more than 50% of its revenues from exports. Recently, the company received the approval from the Cabinet Committee on Economic Affairs (CCEA) for it’s over Rs 40 bn expansion plan.

    Pricing strength led growth
    Sales: Nalco’s topline continues to gallop ahead on the back of sustained demand for the metal, which has helped to keep alumina and aluminium prices steady. While the company has not provided the detailed numbers as yet, considering the production pattern of aluminium (up 11% YoY) and alumina (up 3%), the company has seemingly benefited from higher metal sales. The significantly higher average global metal (up 19% YoY) and alumina (up approx. 14% YoY) prices during the quarter further aided the company’s strong topline performance.

    Operating margins: The operating margins of the company have registered a strong improvement of 970 basis points (9.7%), which, once again, could be attributed to strong realisations. It must be noted that since commodity players have a high operating leverage, any significant improvement in realisations flows directly to the bottomline. Further, the operating expenditure has increased by under 1% YoY despite a 21% growth in topline. This is a result of the fact that the key expenditure heads i.e. raw materials, power & fuel and staff costs, which together account for about 75% of the total operating expenses of the company, were kept under control (see table below).

    Cost break-up (% of net sales)
      2QFY04 2QFY05
    Inc/Dec in stock in trade 4.7% -3.3%
    Raw material consumed 13.5% 10.8%
    Power & Fuel 19.5% 19.6%
    Repairs & maintenance 5.1% 4.9%
    Other Mfg. Expenses 1.9% 3.4%
    Staff costs 7.7% 7.3%
    Administration expenses 2.7% 3.6%
    Selling & distribution exp. 2.3% 1.4%
    Total expenses 57.4% 47.7%

    Net profits: The bottomline of the company has surged by 47% YoY during the quarter, which is a trickle down effect from operating levels, with net profit margins improving by about 500 basis points. The company continues to save on interest costs, which fell by 30% YoY during the quarter. However, it must be noted here that the bottomline has managed this impressive growth despite the significantly higher tax provision (up 110% YoY).

    What to expect?
    The company recently received the go ahead from the CCEA for its capacity expansion plans. Nalco’s expansion plan entails the expansion of its mining capacity from the present level of 4.8 m tonnes to 6.3 m tonnes, the capacity of its refinery at Dhamanjodi from 1.6 m tonnes to 2.1 m tonnes, aluminium capacity from the current 345,000 tonnes to 460,000 tonnes and power generation capacity from 960 MW to 1,200 MW. The company intends to meet this cost of expansion (Rs 40 bn) largely out of internal accruals and to an extent from commercial borrowings. However, the effect of this would be felt only over the long-term with this capacity likely to come on stream only during FY09.

    At Rs 174, the stock is trading at a P/E multiple of 11.3x its annualised 1HFY05 earnings, which, we believe, leaves little room for upside. Going forward, the near-term outlook for the sector and the company continues to remain favourable. It must be noted that Nalco recently raised aluminium prices by about Rs 2,500 per tonne, which would get reflected in the following immediate quarters. However, looking beyond a couple of quarters, we remain skeptical of the company’s ability to sustain the high growth momentum and margins, primarily owing to our concerns with respect to the sustainability of alumina and aluminium prices at the current levels. This is in wake of an impending slowdown in the Chinese economy, which has been the prime consumer of metals over the last couple of years, pushing up commodity prices in the process.



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