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Nalco: A quarter to forget - Views on News from Equitymaster

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Nalco: A quarter to forget

Oct 30, 2012

National Aluminium Company Limited (Nalco) has announced its results for the quarter ended September 2012. The company has reported a decline of 0.3% YoY in net sales and 96.6% 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.
  • At the operating level, the company reported a net loss as against a net profit when compared to the same quarter previous year.
  • Net profits decreased by 96.6% YoY. Net profit margins declined by 8.3% YoY.
  • For the half year ended September 2012, the company has reported a decline of 0.6% YoY in net sales and 55.9% YoY in net profits respectively.

(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 16,137 16,083 -0.3% 33,762 33,564 -0.6%
Expenditure 14,605 16,100 10.2% 26,064 30,538 17.2%
Operating profit (EBDITA) 1,532 (16) -101.1% 7,698 3,026 -60.7%
Operating profit margin (%) 9.5% -0.1%   22.8% 9.0%  
Other income 1,312 1,391 6.0% 2,567 2,794 8.9%
Interest (net) - 41   - 72  
Depreciation 1,179 1,239 5.1% 2,199 2,463 12.0%
Profit before tax 1,665 95 -94.3% 8,066 3,285 -59.3%
Exceptional Item - -   858 -  
Tax 272 47 -82.7% 2,046 1,006 -50.8%
Profit after tax/(loss) 1,393 48 -96.6% 5,162 2,279 -55.9%
Net profit margin (%) 8.6% 0.3%   15.3% 6.8%  
No. of shares (m)         2577  
Diluted earnings per share (Rs)         2.2  
* On a trailing 12 months basis

What has driven performance in 2QFY13?
  • Net sales of the company remained flat. Revenues from aluminium division were up by 2.4% YoY. Revenues from power division were down by 11.3% YoY and revenues from chemical division were up by 4.3% YoY. During the quarter, revenue contribution from aluminium increased to 52.9% as against 51.6% in 2QFY12 as volumes increased by 2.7%. Alumina volumes also declined 6.6%. Average aluminum realizations were down by 3.5% YoY while average alumina realizations were up by 20.6% YoY.

  • The aluminium business incurred an EBIT loss of Rs 532 m due to the 18% YoY increase in power and fuel cost. Further, alumina EBIT declined 67% YoY to Rs 399 m due to lower sales volumes and higher cost. Alumina sales volume was lower due to higher aluminium production.

  • The company reported an operating loss as compared to an operating profit. This was due to high power and fuel cost. Raw material costs as a percentage of net sales stood at 18.1%, compared to 17.6% in 2QFY12. 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 46.8%, compared to 39.6% in 2QFY12. The increase in power costs was due to the lower availability of linkage coal, Employee cost also increased by 26.7% YoY. As a result the company reported negative operating margins.

    Cost break-up...
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Raw Materials 2,840 2,913 3% 5,172 6,076 17.5%
    % of sales 17.6% 18.1%   15.3% 18.1%  
    Staff costs 2,333 2,955 26.7% 4,825 5,790 20.0%
    % of sales 14.5% 18.4%   14.3% 17.3%  
    Power & fuel 6,387 7,535 18.0% 11,194 13,581 21.3%
    % of sales 39.6% 46.8%   33.2% 40.5%  
    Other Expenses 2927 3079 5.2% 5528 6175 11.7%
    % of sales 18.1% 19.1%   16.4% 18.4%  

  • Nalco posted a decline of 96.6% YoY in net profits. The sharp dip in profit was mainly due to supply disruption and poor quality of coal during the rainy season, which forced the company to use more costly imported coal and purchase power from the state grid. Net profit margin also declined by 8.3% YoY. However other income increased by 6% YoY.

What to expect?
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 48, Nalco is trading at 1.1 times our estimated FY15 book value. We maintain our BUY view on the stock from a long term perspective.

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