Stock Review: NALCO

Nalco has hardly gained from the rise in aluminium prices, as other input costs (chiefly coal and fuel) and employee expenses weighed down profitability during the March FY11 quarter. Although the company has major capacity expansion plans underway, its dependency on third parties for raw materials is likely to continue to keep margins compressed in the coming quarters. Nalco's fourth quarter can be considered as one of the slowest in the past six quarters due to flat year-on-year volumes in alumina and aluminium. On an 11% sales growth of . 1,787.51 crore, the company earned an operating profit of . 453.66 crore, down 9% year-on-year. Raw material costs, which were 33% higher than last year, coupled with a 30% rise in staffing costs caused a 600-point year-on-year decline in the operating profit margin. Net profit fell 18% to . 305.26 crore.

Nalco earns more than half of its revenue through the production of aluminium. Even though aluminium prices on the London Metal Exchange (LME) gained over 16% during the third quarter due to the higher cost of production on account of higher alumina and fuel costs, the company was unable to pass on the rise to its end users. Since the start of the April-June quarter, base metal prices have corrected, but aluminium has held steady and is expected to sustain at those levels as a result of the cost push from alumina and power. It is essential for Nalco to increase its production to take advantage of the uptrend in aluminium prices.

Nalco has recently completed its smelter capacity addition from 400,000 tonnes to 460,000 tonnes. In addition to this, the company plans to increase its total alumina refinery capacity by 40% from the current 1.5 million tonnes to 2.25 million. 90% of this is expected to be completed by the end of the first quarter of FY12. It is also in the process of expanding its bauxite mining capacity to from the current 4.8 million tonnes to 6.3 million tones.

The company is virtually debtfree with a debt-equity ratio of 0.01. It has had a healthy growth in cash on books from . 3,152.35 crore to . 3,795.23 crore as on March 31, 2011. At . 90, the stock is available at 6.9 times its priceearnings ratio.