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Nalco: Its all about realisations

Nov 1, 2006

Performance summary
Nalco, the leading alumina and aluminium player in the country, announced splendid results for the quarter ending September 2006. The company has registered a strong topline growth of 37.7% YoY and riding on the back of high alumina prices, bottomline has more than doubled over corresponding previous quarter. Setting up captive power plants and efficient utilisation of available resources have helped the company curtail its costs by 3.7% YoY, in effect aiding operating profit growth to the tune of 90.7% YoY. The company benefited from improved efficiency as well as better realisation with the commodity cycle strengthening during the quarter.

Financial performance snapshot
(Rs m) 2QFY06 2QFY07 Change 1HY06 1HY07 Change
Net sales 10,470 14,416 37.7% 20,257 29,271 44.5%
Expenditure 5,881 5,665 -3.7% 10,773 11,177 3.7%
Operating profit (EBITDA) 4,589 8,751 90.7% 9,484 18,095 90.8%
EBITDA margin 43.8% 60.7%   46.8% 61.8%  
Other income 474 1,014 114.2% 880 1,848 110.0%
Depreciation 992 771 -22.3% 1,975 1,558 -21.1%
Profit before tax/(loss) 4,070 8,994 121.0% 8,389 18,385 119.1%
Tax 1,240 3,044 145.6% 2,753 6,212 125.6%
Profit after tax/(loss) 2,830 5,950 110.2% 5,636 12,173 116.0%
Net margin 27.0% 41.3%   27.8% 41.6%  
No of shares (m) 4,130 4,130   4,130 4,130  
Diluted EPS (Rs)*         34.4  
P/E (times)         6.7  
*trailing twelve month earnings

What is company’s business?
Nalco is the largest alumina and second largest aluminium producer in India. 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 rich bauxite reserves, captive power plants and rail and port operations. The company derives more than 50% of its revenues from exports. The company does not incur interest cost as it being a zero debt company.

Realisations again: Nalco reported a strong 37.7% growth in topline for the quarter ending September 2006, which could be attributed solely to better price realisations. The company operates in three segments – alumina (45.9% of revenues in 2QFY07), aluminium and electricity. While it does not declare volume sales numbers, considering that the aluminium production growth during the quarter was almost flat as compared to the corresponding quarter of the previous fiscal, this could be taken as an indication of flat growth in sales volume during the quarter. However, alumina production was down by 14% YoY. Still, alumina contributed 67.2% at the PBT level, which reflects the benefit of higher prices. As far the aluminium segment is concerned, average aluminum prices during the quarter were higher by 37% to 42% YoY respectively, and has been the key driver for the company’s aluminium sales. Exports contribute to the tune of 50% of revenues, which has further fuelled growth.

Cost break-up (% of sales) 2QFY06 2QFY07
Increase/Decrease in stock 4.5% 2.5%
Consumption of raw material 13.5% 9.9%
Staff cost 7.1% 6.3%
Power and fuel 24.9% 15.0%
Other expenditure 15.1% 10.6%
Total Cost 56.2% 39.3%

Margins at all time high: Setting up captive power plants and efficient utilisation of available resources have helped the company curtail its costs by 3.7% YoY. Costs as a percentage of sales have gone down by 1,690 basis points YoY (16.9%) on account of reduction in power and fuel cost (down by 9.9% YoY as a percentage of sales) and lower other expenses. Strong realisations and increasing demand for aluminium have expanded margins. Being a commodity player, the company enjoys high operating leverage and therefore, any significant improvement in realisations flows directly to the bottomline.

Bottomline has grown by almost 110% YoY on the back of growth in other income and reduced depreciation cost. Bottomline was up by 710 basis points on account of higher other income. If one excludes other income, net margins is lower at 34.2% of sales instead of 41.3%.

Over the few quarters: Margins dropped during 2QFY07as compared to 1QFY07 on account of lower revenues. The bottomline growth is mainly achieved no account of higher prices and increase in other income over the quarters. The company has also reduced its cost of production, which has resulted growth at the operating profit level.

  2Q06 3Q06 4Q06 1Q07 2Q07
Net profit margin 27.0% 29.7% 39.5% 41.9% 41.3%
EBITDA margin 43.8% 50.2% 63.1% 62.9% 60.7%

What to expect?
At the current price of Rs 231, the stock is trading at a price to earnings multiple of 6.7 times its trailing twelve month earnings. Growing demand for inputs i.e. alumina and a favorable demand supply equation over the long-term are expected to have a positive impact in the coming quarters. We remain positive on the prospects of the company, as the outlook for the business remains positive in the medium-term.

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