• NOVEMBER 7, 2002

Nalco: Expansion brings buffer

At first glance, second quarter result of National Aluminium Company Ltd. (Nalco) is likely to have surprised the markets. Hindalco and Indal registered topline growth of 2% and 10% respectively in the concerned period. Over the past four years, Nalco has been implementing an expansion project to increase capacity by 50%. Turnover for September '02 quarter is likely to have received a boost with third stream of alumina refinery expansion being commissioned at start of 2002.

(Rs m)2QFY022QFY03Change1HFY021HFY03Change
Net Sales 4,790 5,962 24.5% 10,214 11,963 17.1%
Other Income 343 386 12.8% 682 798 17.0%
Expenditure 2,785 3,465 24.4% 5,520 7,203 30.5%
Operating Profit (EBDIT) 2,005 2,497 24.6% 4,694 4,760 1.4%
Operating Profit Margin (%) 41.9%41.9% 46.0%39.8% 
Interest 263 295 11.9% 507 617 21.8%
Depreciation 774 877 13.2% 1,521 1,766 16.1%
Profit before Tax 1,3101,71230.7%3,3483,176-5.1%
Extra-ordinary items (1,225) -   (1,225) -  
Tax 23 526 2188.3% 521 999 91.5%
Profit after Tax/(Loss) 62 1,186 1815.8% 1,602 2,177 35.9%
Net profit margin (%) 1.3%19.9% 15.7%18.2% 
No. of Shares (eoy) 644.3 644.3   644.3 644.3  
Diluted Earnings per share* 0.47.4 5.06.8 
P/E Ratio      10.7  
* annualised      

With last phase of refinery expansion, the capacity has been augmented by 525,000 metric tonnes (MT). This completes expansion at the mining (2.4 MMT) and refining complex. The first two streams of alumina refinery expansion were commissioned at start of FY02 leading to a 35% rise in alumina exports. We reckon much of the growth in sales for the concerned quarter is from alumina exports. Lower excise charges as a percent of sales corroborates this belief. Having said that, the company indicated that a few smelting pots were commissioned in 2QFY03 with all pots likely to go onstream by March '03 -- 10 months behind the original schedule. Aluminium revenues for the concerned quarter are higher by 17% YoY. The 7th captive power plant unit was to be commissioned in September '02 to meet the additional power requirements.

Similar to industry peers, turover has been driven by volumes. However, higher capacity has led to continuing rise in inventory. London Metal Exchange (LME) aluminium spot prices at $ 1,311/ tonne were lower by 5% YoY in 2QFY03. Domestic prices are likely to have come under further pressure with lowering of import tariffs in FY03 and appreciation of rupee-dollar exchange rate. Also, average realisations are likely to have been impacted by higher sales in the less remunerative alumina export segment. International alumina prices are likely to have remained flat at $150/ tonne. Despite pressure on realisations operating margins have been maintained. We reckon lower raw material prices -- bauxite & caustic soda -- has facilitated stability in margins. Caustic soda prices are lower by an estimated 30% YoY. That said, selling & distribution costs have jumped considerably, which could be indicative of company push towards exports.

With third stream of alumina refinery being commissioned, interest and depreciation charges have been passed through the income statement. Same is true for aluminium smelting pots, which have been commissioned in 2QFY03. As mentioned, expansion at smelting & power complex is likely to be completed in FY03. Consequently, going forward, the company is likely to benefit from higher volumes. However, considering delay in implementation we will review our estimates. We reckon aluminium prices are likely to remain soft at $1,350/ tonne for FY03.

Nalco had undertaken a revision of executive and non-executive pay scales in 2QFY02, which led to surge in staff costs. In fact, for non-executive employees, the company entered into a ten-year wage settlement with retrospective effect from January '97, which created an extra-ordinary charge last fiscal. Accounting for the charge has led to sharp YoY growth in post tax profits. At Rs 70 the scrip is trading on a multiple of 10.7x 1HFY03 annualised earnings. Historically, Nalco trades in a band of 3x-6x earnings. Valuations have breached the band ceiling, as markets expected the company to be privatised in FY03. Over the past two trading sessions, considerable market cap has been wiped out with the Government asking the disinvestment ministry to put on hold the due diligence process.

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 (Research Analyst) bearing Registration No. INH000000537 (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, Canada or the European Union countries, 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 (Research Analyst)
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