At first glance, second quarter result of National Aluminium Company Ltd. (Nalco) is likely to have surprised the markets. Hindalco and Indal registered topline growth of 2% and 10% respectively in the concerned period. Over the past four years, Nalco has been implementing an expansion project to increase capacity by 50%. Turnover for September '02 quarter is likely to have received a boost with third stream of alumina refinery expansion being commissioned at start of 2002.
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With last phase of refinery expansion, the capacity has been augmented by 525,000 metric tonnes (MT). This completes expansion at the mining (2.4 MMT) and refining complex. The first two streams of alumina refinery expansion were commissioned at start of FY02 leading to a 35% rise in alumina exports. We reckon much of the growth in sales for the concerned quarter is from alumina exports. Lower excise charges as a percent of sales corroborates this belief. Having said that, the company indicated that a few smelting pots were commissioned in 2QFY03 with all pots likely to go onstream by March '03 -- 10 months behind the original schedule. Aluminium revenues for the concerned quarter are higher by 17% YoY. The 7th captive power plant unit was to be commissioned in September '02 to meet the additional power requirements.
Similar to industry peers, turover has been driven by volumes. However, higher capacity has led to continuing rise in inventory. London Metal Exchange (LME) aluminium spot prices at $ 1,311/ tonne were lower by 5% YoY in 2QFY03. Domestic prices are likely to have come under further pressure with lowering of import tariffs in FY03 and appreciation of rupee-dollar exchange rate. Also, average realisations are likely to have been impacted by higher sales in the less remunerative alumina export segment. International alumina prices are likely to have remained flat at $150/ tonne. Despite pressure on realisations operating margins have been maintained. We reckon lower raw material prices -- bauxite & caustic soda -- has facilitated stability in margins. Caustic soda prices are lower by an estimated 30% YoY. That said, selling & distribution costs have jumped considerably, which could be indicative of company push towards exports.
With third stream of alumina refinery being commissioned, interest and depreciation charges have been passed through the income statement. Same is true for aluminium smelting pots, which have been commissioned in 2QFY03. As mentioned, expansion at smelting & power complex is likely to be completed in FY03. Consequently, going forward, the company is likely to benefit from higher volumes. However, considering delay in implementation we will review our estimates. We reckon aluminium prices are likely to remain soft at $1,350/ tonne for FY03.
Nalco had undertaken a revision of executive and non-executive pay scales in 2QFY02, which led to surge in staff costs. In fact, for non-executive employees, the company entered into a ten-year wage settlement with retrospective effect from January '97, which created an extra-ordinary charge last fiscal. Accounting for the charge has led to sharp YoY growth in post tax profits. At Rs 70 the scrip is trading on a multiple of 10.7x 1HFY03 annualised earnings. Historically, Nalco trades in a band of 3x-6x earnings. Valuations have breached the band ceiling, as markets expected the company to be privatised in FY03. Over the past two trading sessions, considerable market cap has been wiped out with the Government asking the disinvestment ministry to put on hold the due diligence process.
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