Stock Review: NATIONAL Aluminium (Nalco)

 

NATIONAL Aluminium (Nalco), a dominant player in the non-ferrous metal sector, benefited from higher average aluminium prices on a year-on-year basis in the quarter to December 2010. The company's operating profit margin improved 610 basis points compared with a year ago to 27% in the third quarter, while its net sales grew barely 1.8% to . 1,443 crore.

   In its key aluminium division, which accounts for almost four-fifths of its income from operations, Nalco benefited from strong demand from user industries in emerging markets, like cans for the beverage industry and foil wrappings. The company also has a strong emphasis in the higher-value products segment. While the average LME price for this commodity rose nearly 16% year-on-year to $2,357 per tonne in the third quarter, Nalco's strategy resulted in a fourfold jump in segment profit of this key division in the December quarter. Its net profit also rose 64.9% yearon-year to 256 crore in the third quarter.

   Nalco has also announced a stock split coupled with a bonus issue. The results were announced after the close of trading on Monday, and on Tuesday, the stock rose 2.1% to . 402.5. This was in broad contrast to the negative investor sentiment on the Street.

   Analysts are optimistic that aluminium prices could maintain their upward trend in the near term, given the strong demand conditions globally. This, in turn, should help the company grow its earnings over the next few quarters. However, in its smaller divisions like electricity, the company needs to ensure that it can get sufficient supplies of coal and also at a reasonable price to meet its production targets. In the earlier quarters, the company had to depend on costly imported coal for meeting the requirements, hurting the performance of this division.

   Nalco trades at a P/E of 22.6 times on a trailing four-quarter basis (excluding stock split and bonus issue). Its nearest rival, Hindalco, trades at a P/E of nearly 21.4 times on a trailing 12 months basis. And while both these stocks have outperformed the broader market over the past three months, their valuations broadly factor in their respective growth prospects in the near term.