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Nalco: Not first amongst equals

Nov 13, 2001

National Aluminium Company Ltd. (Nalco) is amongst the worst affected non-ferrous metal players with the downturn in business conditions and prevailing weakness in commodity prices. Hindalco and Indal, the key competitors, reported a marginal growth in sales for 2QFY02.

(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Net Sales 5,857 4,790 -18.2% 10,551 10,214 -3.2%
Other Income 397 343 -13.6% 719 682 -5.2%
Expenditure 2,955 2,785 -5.8% 5,272 5,520 4.7%
Operating Profit (EBDIT) 2,902 2,005 -30.9% 5,279 4,694 -11.1%
Operating Profit Margin (%) 49.5% 41.9%   50.0% 46.0%  
Interest 238 263 10.4% 489 507 3.5%
Depreciation 714 774 8.4% 1,446 1,521 5.2%
Profit before Tax 2,346 1,310 -44.1% 4,062 3,348 -17.6%
Extra-ordinary items - (1,225)   - (1,225)  
Tax 596 23 -96.1% 1,034 521 -49.6%
Profit after Tax/(Loss) 1,750 62 -96.4% 3,028 1,602 -47.1%
Net profit margin (%) 29.9% 1.3%   28.7% 15.7%  
No. of Shares (eoy) 644 644   644 644  
Diluted Earnings per share* 10.9 0.4   9.4 5.0  
P/E Ratio   129.6     10.1  
* annualised            

Net sales of Nalco have swung sharply over the last two quarters. In 1QFY02, the company reported a 15% growth in sales. It has followed up this impressive performance with an 18% drop in sales. Alumina and aluminium registered increased production of 17.8% and 2% for 1HFY02. However, the entire output is not likely to have culminated in higher volume sales, as inventory has increased. Also, aluminium, which is the key contributor to gross sales has reported a marginal production growth.

Adding to the pressure on topline was an estimated 5.3% YoY decline in aluminium realisations to $1,440 / tonne. Stickiness in operating expenses further impacted profits and profitability. Manufacturing costs, which constitute 48.3% of operating expenses, rose by 6% in 1HFY02. Staff costs that made up 19% of the total expenses, rose sharply by 34% during the same period. Nalco had undertaken a revision of executive and non-executive pay scales, which led to the surge in staff costs. In fact, for non-executive employees, the company has entered into a ten-year wage settlement with retrospective effect from January '97, which has created an extra-ordinary charge on the income statement.

The company embarked on a massive expansion plan across the board in its mines, refinery and smelter division starting over 1997 and 1998. The bauxite mining capacity was augmented to 4.8 m tonnes per annum (MTPA) from 2.4 MTPA. The alumina refining capacity was enhanced to 1.6 MTPA and was completed in March '01. Expansions at the smelter and captive power plants are still in progress and scheduled to be completed by May 2002. The refinery capacity will be hiked to 345,000 TPA from 230,000 TPA. Currently, the company operates 6 power plants of 120 MWs each and is in the process of increasing the number to 8. The entire expansion exercise, which is to be completed by 2002, will augment capacity by an estimated 50%.

At Rs 50 the Nalco scrip is quoting at 10.1x 1HFY02 annualised earnings. However, this is due to the large one-time wage settlement payment. Adjusting for the same the scrip is trading on an estimated multiple of 5.7x 1HFY02 annualised earnings.

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