Nalco: Contract woes

A fall in aluminium prices could hurt Nalco because it sells more of its output through short-term contracts and at spot prices.

The management at National Aluminium (Nalco) believes that aluminium prices will remain stable in the range of $2400-2500 per tonne till the end of 2008. Prices of alumina, it feels, would rule at around $350-400 levels per tonne. Aluminium prices have declined by 20 per cent in past two months to $2,460 per tonne, according to Bloomberg.

Inventories for the metal have risen by about 4 per cent in the last two months to 3 million tonnes. Analysts believe a slowdown in the demand for aluminium cannot be ruled out since consumers such as the autos and construction sectors are not faring too well. As such, prices could remain at these levels.

Nalco will be affected by the softer aluminium prices to some extent as its revenue mix is tilted towards shorter one- year contracts and spot sales. Even though volumes for the firm were flat in the June 2008 quarter, Nalco’s net sales grew by 26 per cent to Rs 1,165 crore because of strong aluminium and blended alumina prices. In FY08 the company’s net sales had declined by 16 per cent to Rs 4,988 crore.

Nalco has been facing some disruptions problems while sourcing coal from Coal India because some supplies of coal are believed to have been diverted to power utilities. Under the circumstances, Nalco may have to explore alternate options, such as e-auctions and imports, both of which are more expensive.

That could hurt its profitability. Currently, coal sourced from Coal India, costs about Rs 700 per tonne while coal bought through e-auctions cost around Rs 2,110 per tonne and imported coal about Rs 7,200 per tonne. The company is looking forward to the commissioning of its captive coal plant at Utkal-Eblock in Orissa, which has an estimated reserve of about 70 million tonnes. But this could take another three years to become operational.

Nalco has big capital expenditure plans in the next few years and is confident of funding these easily because it had virtually no debt on its balance sheet at the end of FY08. Moreover, it has cash and cash equivalents to the tune of Rs 3,500 crore. Since January 2008, the Nalco stock has outperformed the market falling by 25 per cent compared to a 35 per cent fall in the Sensex. At the current price of Rs 379 the stock trades at 12.6 times its estimated FY09 earnings.