Stock Review: NALCO

Buoyed by stronger LME (London Metal Exchange) aluminium prices and higher alumina sales, Nalco's earnings per share rose 33% over the previous year in the first quarter of FY12. Compared with its peers, the country's third largest aluminium producer has managed the increase in input costs well, maintaining operating profit margins at last year's levels vis-à-vis peers which have not fared too well. Moreover, having obtained the necessary environmental clearances for mining bauxite, a key aluminium making ingredient, prospects for increased profitability have improved.

Nalco recently announced it received the final stage II clearance from the ministry of environment and forests for the renewal of its bauxite mining lease in the Panchpatmali South Block of Koraput district in Orissa. This is likely to benefit the PSU player, as its peers from the private sector still struggle with bauxite availability.

During the quarter under review, aluminium prices on the LME averaged $2,600/tonne. Since then, prices have declined around 5% to about $2,470/tonne following the turmoil in financial markets spurred by the debt crisis is Europe and the US. Ahead of the market slide, global mining major Rio Tinto Alcan forecast softening of aluminium prices in the near term as inventories remain high. Though Chinese demand remains strong, till the uncertainty in the rest of the world subsides, aluminium prices are not likely to see a sharp rise from here. This may impact Nalco's earnings growth to some extent. Nalco reported a 35% rise in sales, year-on-year, to . 1762.53 crore, the highest growth in four quarters. The growth was on account of the 24% increase in aluminium prices and as the company's alumina sales rose 60%. Despite a 38% rise in raw materials and 30% increase in power and fuel expenses, N managed to keep its operating profit margin at 30% by keeping other expenses in check. Its net profit was up by 33% at . 376.84 crore.

Adverse market conditions over the past three months have caused the stock to lose close two-thirds of its market capitalisation. It touched a new 52-week low on Wednesday. At the CMP of . 62, it is available at 4.2 times its trailing 12-month earnings per share.