• FEBRUARY 12, 2002

Nalco: Suffering continues

Nalco continued its first half performance into the third quarter of the current fiscal with sales declining marginally. This, however, is a much improved performance, as compared to the second quarter during which the company reported an 18% slide in sales.

(Rs m)3QFY013QFY02Change9mFY019mFY02Change
Net Sales 5,742 5,543 -3.5% 16,293 15,757 -3.3%
Other Income 455 359 -21.1% 1,174 1,041 -11.3%
Expenditure 2,803 3,391 21.0% 8,147 10,136 24.4%
Operating Profit (EBDIT) 2,939 2,152 -26.8% 8,146 5,621 -31.0%
Operating Profit Margin (%)51.2%38.8% 50.0%35.7% 
Interest 243 305 25.9% 732 812 10.9%
Depreciation 719 805 11.9% 2,165 2,326 7.4%
Profit before Tax2,4321,400-42.4%6,4223,523-45.1%
Tax 512 298 -41.7% 1,546 820 -47.0%
Profit after Tax/(Loss) 1,920 1,102 -42.6% 4,877 2,704 -44.6%
Net profit margin (%)33.4%19.9% 29.9%17.2% 
No. of Shares 644 644   644 644  
Diluted Earnings per share11.96.8 10.15.6 
P/E Ratio  11.5    14.1  

The performance of the company continues to lag behind industry peers. Both Hindalco and Indal have been able to protect sales from declining in the quarter ended December '01. Nalco seems to have suffered due to its heavy dependance on alumina & aluminium segment. The above category contributed a shade above three quarters to the turnover in FY01. In fact, the primary aluminium division contributed to 57.5% of sales during the same period. The numbers indicate that the company does not have a significant presence in the downstream aluminium business. The downstream segment is more immune to demand changes and fluctuations in aluminium prices. Another factor, which is likely to have impacted performance is the company's strong presence in export markets. In FY01, export sales, as percentage of gross turnover was 54.6%. Weakness in the global economy is likely to have resulted in drying up of demand. This also impacted aluminium prices on the London Metal Exchange (LME), which declined by 16% YoY in 3QFY02.

The reasons for volatility in revenues have been mentioned above. However, expenses are more sticky, which has resulted in the volatility being reflected in operating margins. The decline in sales and dramatic slide in OPM has resulted in a sharp fall in operating profits. Power costs, which is the largest constituent of operating expenses, rose by double digits. Also, raw material costs has risen sharply, which could indicate that the decline in bauxite & alumina prices has not been commensurate with the slide in aluminium prices. Nalco had undertaken a revision of executive and non-executive pay scales, which has led to the surge in staff costs.

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. 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 schedule.

At Rs 79, the company is trading on a multiple of 14.1x 9mFY02 annualised earnings. This is significantly higher than its P/E band of 3x-6x earnings. The stocks has received a booster with the Government speeding up its disinvestments process. Nalco is among the list of companies likely to be divested next fiscal. Markets seem to think that the Government is more likely to meet its promises.

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