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Nalco: Profits surge - Views on News from Equitymaster

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Nalco: Profits surge

Nov 22, 2014

Nalco has announced its results for the quarter ended Sep 2014. The company has reported a 14.8% YoY and 90.6% YoY growth in sales and net profits respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Topline of the company increased by 14.8% YoY.
  • At the operating level, the company reported an increase in profits of 77.2% YoY due to higher sales. Operating margins also improved to 23.8% during the quarter.
  • Net profits increased by 90.6% YoY. Apart from strong operational performance, fall in depreciation expenses by 19.3% YoY cushioned profits.

Financial performance snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 17,382 19,955 14.8% 32,988 36,756 11.4%
Expenditure 14,706 15,212 3.4% 28,781 29,248 1.6%
Operating profit (EBDITA) 2,676 4,743 77.2% 4,207 7,508 78.5%
Operating profit margin (%) 15.4% 23.8%   12.8% 20.4%  
Other income 1,228 1,686 37.3% 3,016 3,590 19.0%
Interest (net) -   -   NA -   -   NA
Depreciation 1,286 1,038 -19.3% 2,530 1,993 -21.2%
Profit before tax 2,619 5,392 105.9% 4,692 9,105 94.1%
Tax 827 1,976 138.9% 1,303 2,980 128.7%
Profit after tax/(loss) 1,792 3,415 90.6% 3,389 6,125 80.8%
Net profit margin (%) 10.3% 17.1%   10.3% 16.7%  
No. of shares (m)         2,577  
Diluted earnings per share (Rs)         2.4  
P/E ratio (x)*         16.9  
* On a trailing 12 months basis

What has driven performance in 2QFY15?
  • Net sales of the company increased by 14.8% YoY due to strong performance from the aluminum business (+23% YoY). However, revenues from the chemicals business were flat (2.3% YoY) during the quarter. The alumina production is up by 10K while the metal production is up by 3-4K during the quarter on a QoQ basis.

  • Operating profits surged 77.2% YoY during the quarter. This was because of 206.7% QoQ jump in aluminum EBIT which stood at Rs 953.6 m. Chemical EBIT also registered 57.7% QoQ improvement. Captive sourcing of bauxite and better realizations improved the profitability of the alumina business. Further, power costs also declined 6.6% YoY as there was no import since the internal requirement was being met via captive sources.

  • PAT was up 90.6% YoY, imitating the operational performance. A 19.3% YoY fall in depreciation expenses and a 37.3% YoY rise in other income boosted profits.
What to expect?
At the current price of Rs 60, the stock is trading at a multiple of 16.9x its TTM earnings. Nalco's earnings have remained extremely volatile in the past few quarters because of a sharp movement in power and fuel costs. However, in this quarter power & fuel costs declined on a yearly basis as there was no import of external power. This coupled with captive consumption of bauxite resulted in sharp rise in aluminum EBIT. What is further encouraging is the fact that the profitability of this segment has improved substantially on a QoQ basis.

However, considering the volatility in raw material costs and the de-allocation of coal blocks that has happened (even NALCO's coal block was de-allocated in the recent Supreme Court judgment), we would like to wait for some time to indeed see the turnaround in the margin profile of the company. Also, valuations at 16.9x do not appear cheap. As a result, we maintain our SELL view on the stock.

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