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Nalco: Stellar quarter - Views on News from Equitymaster
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Nalco: Stellar quarter
Nov 13, 2013

Nalco has announced its results for the quarter ended September 2013. The company has reported an increase of 8.1% YoY in net sales and 3648.3% YoY in net profits respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Topline of the company increased by 8.1% YoY.
  • At the operating level, the company reported an operating profit as compared to an operating loss in 2QFY13 on account of lower power and fuel cost.
  • Net profits increased by staggering 3648.3% YoY. Net profit margins increased by 10% YoY.
  • For the half year ended September, 2013, net sales declined by 1.7% YoY and net profits increased by 48.7% YoY.

Financial performance snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 16,083 17,382 8.1% 33,564 32,988 -1.7%
Expenditure 16,100 14,706 -8.7% 30,538 28,781 -5.8%
Operating profit (EBDITA) (16) 2,676 NA 3,026 4,207 39.0%
Operating profit margin (%) -0.1% 15.4%   9.0% 12.8%  
Other income 1,391 1,228 -11.7% 2,794 3,016 7.9%
Interest (net) 41 -   72 -  
Depreciation 1,239 1,286 3.8% 2,463 2,530 2.7%
Profit before tax 95 2,619 2665.6% 3,285 4,692 42.8%
Exceptional Item - -   - -  
Tax 47 827 1664.0% 1,006 1,303 29.5%
Profit after tax/(loss) 48 1,792 3648.3% 2,279 3,389 48.7%
Net profit margin (%) 0.3% 10.3%   6.8% 10.3%  
No. of shares (m)         2577  
Diluted earnings per share (Rs)         2.1  
P/E ratio (x)*         19.5  
* On a trailing 12 months basis

What has driven performance in 2QFY14?
  • Net sales of the company increased by 8.1% YoY due to higher alumina sales. Its alumina sales increased by 20.4% YoY to 374,000 tonne whereas aluminium sales declined by 26.5% YoY to 75,000 tonne.

  • Nalco posted 27% YoY and 12% QoQ drop in aluminium output at 74,580 ton due to a deliberate cut in output following inadequate availability of linkage coal and unviable aluminium prices using e-auctioned coal. Although alumina performance was strong with a 20% YoY rise in output at 478,500 ton, it was flat QoQ. Nonetheless, Nalco posted very strong jump of 92% YoY and 32% QoQ in alumina volume at 373,314 ton, driven by lower aluminium output (leading to higher availability of merchant alumina) and inventory liquidation.

  • Aluminum realization increased 7% QoQ to Rs 130,019/t (US $2,080/t), while alumina realization was up 8% QoQ to Rs 19,651/t (US $314/t). Product premium dipped 1.1% QoQ to 16.7% in 2QFY14. Segmental EBIT of aluminum (full integration basis) remained negative at Rs 223 m (negative Rs 226 m in 1QFY14). Segmental EBIT (external sales) of alumina improved 78% QoQ Rs 2.1 bn in 2QFY14.

  • Lower aluminium volume was offset by higher alumina volume, which led to 8% YoY and 11% QoQ increase in revenue at Rs 17,382 m. On QoQ basis, Nalco reported a 75% jump in EBITDA, driven by higher volume in alumina and better aluminium/alumina prices on the back of rupee depreciation. On YoY basis, the performance improved substantially, as the company had suffered Rs16mn loss in 2QFY13 because of very high power and fuel costs. At the PAT level, Nalco posted just a 12% QoQ increase, despite strong EBITDA, following lower other income as 1QFY14 included one-time gains, and a rise in the tax rate - from 23.0% to 31.6%.

    Cost break-up
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Raw Materials 2,913 2,603 -11% 6,076 5,339 -12.1%
    % of sales 18.1% 15.0%   18.1% 16.2%  
    Staff costs 2,955 3,228 9.2% 5,790 6,442 11.3%
    % of sales 18.4% 18.6%   17.3% 19.5%  
    Power & fuel 7,535 5,132 -31.9% 13,581 10,194 -24.9%
    % of sales 46.8% 29.5%   40.5% 30.9%  
    Other Expenses 3079 3354 8.9% 6175 6968 12.8%
    % of sales 19.1% 19.3%   18.4% 21.1%  

  • At the PAT level, Nalco posted just a 12% QoQ increase, despite strong EBITDA, following lower other income as 1QFY14 included one-time gains, and a rise in the tax rate - from 23.0% to 31.6%.
What to expect?
Aluminum segment performance will remain volatile due to uncertain coal supply. Alumina refineries however will continue to operate efficiently. The company is yet to make significant progress on land acquisition to commence production from Utkal E coal block. The company targets to operationalize the block by December 2014 which is optimistic in our view.

At the current price of Rs 40, the stock is trading at a multiple of 19.5 times its trailing twelve month earnings. We maintain our Hold view on the stock from a long term perspective. We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single large cap stock comprises more than 5% of your portfolio

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