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NALCO: Input costs shrink margins
Nov 14, 2011

Nalco has announced its results for the quarter ended September 2011. The company has reported a rise of 9.1% YoY in net sales and 37.8% YoY decline in net profits respectively during the quarter. Here is our analysis of the results.

Performance summary
  • Topline grows by 9.1% YoY during the quarter ended September 2011 on account of higher prices despite flat volumes.
  • Operating profits declined by 56.1% YoY during the quarter owing to higher expenditure. EBITDA margins declined by 14% YoY.
  • Net profits decreased by 37.8% YoY on account of higher depreciation and high input cost. Net profit margins declined by 6.5% YoY.
  • Other income grew by 54.7% YoY during the quarter ended September 2011.

Financial performance snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 14792 16139 9.1% 27872 33765 21.1%
Expenditure 11314 14614 29.2% 20457 26941 31.7%
Operating profit (EBDITA) 3,477 1,526 -56.1% 7415 6824 -8.0%
Operating profit margin (%) 23.5% 9.5%   26.6% 20.2%  
Other income 854 1321 54.7% 1751 2587 47.7%
Depreciation 952 1179 23.9% 1868 2199 17.7%
Interest 0 0   0 0  
Profit before tax 3379 1667 -50.7% 7298 7212 -1.2%
Tax 1139 274 -75.9% 2217 2050 -7.6%
Profit after tax/(loss) 2240 1393 -37.8% 5081 5162 1.6%
Net profit margin (%) 15.1% 8.6%   18.2% 15.3%  
No. of shares (m)         2577.2  
Diluted earnings per share (Rs)*         4.2  
P/E ratio (x)*         13.6  
* On a trailing 12 months basis

What has driven performance in 2QFY12?
  • Nalco reported a topline growth of 9.1% YoY during the quarter ended September 2011. This was due to higher selling prices of alumina and aluminium, despite flat volumes. While revenues from chemicals and aluminium segments grew by 5.8% and 8.4% YoY respectively, revenues from electricity segment declined by 21.1% YoY.

    Cost break-up
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Raw Materials 2248 2958 31.6% 3193 4736 48.3%
    % of sales 15.2% 18.3%   11.5% 14.0%  
    Staff costs 2027 2394 18.1% 4210 5773 37.1%
    % of sales 13.7% 14.8%   15.1% 17.1%  
    Power & fuel 4905 6387 30.2% 8655 11195 29.4%
    % of sales 33.2% 39.6%   31.1% 33.2%  
    Manufacturing Expenses 1323 1876 41.8% 2822 3308 17.2%
    % of sales 8.9% 11.6%   10.1% 9.8%  
    Other Expenses 812 999 23.1% 1577 1928 22.3%
    % of sales 5.5% 6.2%   5.7% 5.7%  

  • Operating profits saw a decline of 56.1% YoY on back of high raw material costs, power and fuel costs and manufacturing expenses. Operating profits and operating margins declined by 56.1% and 14% YoY respectively. This was due to lesser and poor quality of coal supplied by Coal India which forced Nalco to use more expensive imported coal, purchased power from State Grid and also use heavy furnace oil in more quantity.

  • Rising expenditure led the bottomline to decline by 37.8% YoY during the quarter. Net profit margins declined from 15.1% in 2QFY11 to 8.6% in 2QFY12. Alumina realizations for 2QFY12 was at USD $400 as against USD $309 in 2QFY11.

  • For the half year ended September 2011, sales and net profits grew by 21.1% YoY and 1.6% YoY.

What to expect?
During the quarter, the fourth stream of alumina hydrate plant under second phase of expansion has been commissioned. This will increase the capacity of alumina hydrate production by 5.25 million tonnes (MT). With this increase, the management is targeting additional 30,000 to 60,000 tonnes of alumina sales in the third quarter.

Though on a year-on-year basis, aluminium prices have been higher, they have corrected to an extent from the recent high. The main reason for this is the economic turmoil in the developed countries and the resulting uncertainty. The emerging markets too are facing concerns of high inflation and slowing growth rates. As a result, the stock prices of metal have fallen significantly. At the current price of Rs 58, Nalco is trading at FY14 forward price to book value of 1.06 times. We maintain our neutral view on the stock.

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