X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Nalco: Linked to the cycle - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Dec 1, 2001

    Nalco: Linked to the cycle

    Like its peers, the National Aluminium Company Ltd. (Nalco) scrip has engineered a smart comeback on the bourses. Much of this performance seems to be driven by the up-tick in international aluminium prices accompanied by a general shift in favour of equities. The BSE Sensex has climbed 26.7% since September 24 lows while Nalco has run up by 18.8%.

    Aluminium prices have staged a smart rally post the World Trade Centre (WTC) incidents. Prices of the base metal, which ruled at $1,500 / tonne levels at the start of the fiscal, slid continuously to $1,350 / tonne levels by mid September before collapsing to their lows of $1,240 / tonne in November. Like all other commodities, aluminium suffered, as fears of more pronounced economic downturn and coercive action against the perpetrators severely dented business confidence. However, the difficult days seem to be a thing of the past, which seems to be reflected by the run in global equity markets. Aluminium prices have recovered from their lows rising by 12.4% to $1,400 / levels. All this suggests that along with the global economy, led by the U.S, the aluminium sector is likely to chart a recovery sooner rather than later.

    Global demand for the metal over the next three-years is likely to grow at historical rates. Much of this growth is expected to come from China (demand grew by 17% in 2000), which is likely to offer better opportunities to Asian manufacturers. Going forward, the likely mismatch in global demand-supply, low inventory levels and closures of plants in the U.S could support a rise in aluminum prices.

    Nalco seems to be a good play on the aluminum cycle, as alumina & aluminum are the largest constituents of the company's sales. In FY01, the above category contributed a shade above three quarters to the turnover. In fact, the primary aluminium division contributed to 57.5% of sales during the same period. That said, the statistic also indicates that the company does not have a significant presence in the downstream aluminium business. The extent to which Nalco can de-commoditise its business can be gauged from the fact that the refining & smelting contribution to sales of Alcoa, a leading global aluminium player, was 25% in 2000.

    Another factor, which is likely to swing with trends in the global economy, is the company's strong presence in the export markets. In FY01, export sales, as percentage of gross turnover was 54.6%, which is 6.4% higher than FY00. Nalco is amongst the few Indian companies (excluding software services) that generate a greater share of sales from overseas. Again, profile of exports is skewed towards commodities with alumina & aluminium constituting 95% of export earnings. Competing in export markets, the company does not enjoy the benefits of any tariff barriers. Consequently, pressure on realizations could be greater. Also, they are likely to be more closely linked to international price trends. First nine months of the current calendar year proved challenging for Nalco, as breaks were put on global economic growth rates. But with exports the company is likely to benefit from any depreciation in the rupee.

    1HFY02: Nalco not first among equals   
      Nalco Hindalco Indal
    Net sales -3.2% 0.9% 10.1%
    Operating profits -11.1% -5.4% 1.3%
    PAT -6.6% -0.7% 9.8%
    With greater dependence on the upstream business the corollary immediately comes to mind. Therefore, investors are likely to witness more volatility in the stock and should be alert of trends in the commodity cycle, as shifts in aluminium prices are likely to reflect on the company's financials. There could not be a better time to emphasize this point. Second quarter ended September '01, sales and post-tax profits (excluding extraordinary items) were down 18.2% and 26.4% respectively. Operating margins were bashed down 760 basis points. Non-ferrous metals was among the few sectors that disappointed markets.

    Realising the cyclicality in business, the company seems to be taking steps to venture downstream, which could smoothen future earnings. The company has commissioned a 10,000 tonnes per annum (TPA), detergent grade zeolite plant at Damanjodi, Orissa (same location of alumina refinery). Although costlier, zeolite internationally is a preferred raw material in making detergents. This is due to the eco-friendly characteristics compared to the current ingredient sodium tri-poly phosphate (STPP). The company is campaigning for the phasing out or banning of STPP, a road tread by developed countries. In the interim, much of the sales are targeted to export markets. The company is also putting up a 26,000 TPA special grade alumina plant, which was to be commissioned by March '01 but is running behind by an estimated six months.

    Nalco: Ongoing expansion programme
        Mining Refining Smelting Power
              7th Unit 8 Unit
    Expanded capacity MMT 2.4 0.8 0.2 120 MW 120 MW
    Aggregate capacity MMT 4.8 1.6 0.3 720 MW 840 MW
    Estimated project cost Rs bn 1.2 12.9 16.3 4.2 4.5
    Status   complete delayed delayed - -
    Expected completion   - Jan '02 Nov '02 May '02 Feb '04

    The company is a strong player in the aluminium business with fully integrated operations from mining to smelting and captive power. Consequently, it is amongst the lowest cost aluminium producers in the world. Also, the company has renewed its technical assistance agreement with Alumina Pechiney, France till 2003. With non-ferrous metals likely to chart a revival, the coming year for Nalco looks encouraging.

    At the current market price Rs 50.1 the company trades on a multiple of 10.2x 1HFY02 annualised earnings. The stock usually trades on a multiple of 5x-6x earnings. The subdued profits have led to increased valuations and a reversal in earnings is likely to lead to valuations reverting to the mean. Consequently, the run in not likely to be unencumbered.

     

     

    Equitymaster requests your view! Post a comment on "Nalco: Linked to the cycle ". Click here!

      
     

    More Views on News

    Hindalco: Strong Performance at Operating Level (Quarterly Results Update - Detailed)

    Feb 22, 2017

    Hindalco Industries has reported a 14.5% YoY increase in the topline while the bottomline came at Rs 3.2 billion.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    NALCO SHARE PRICE


    Aug 18, 2017 01:13 PM

    TRACK NALCO

    NALCO 5-YR ANALYSIS

    Detailed Financial Information With Charts

    COMPARE NALCO WITH

    MARKET STATS