Nalco: Weak Q2, but improvement likely

Performance may look up as realisation and volumes improve

The National Aluminium Company (Nalco)’s performance for the September 2016 quarter was disappointing on volume and profitability fronts, the latter impacted by rising raw material and power costs. In the second quarter (Q2), total aluminium prices including premium, on the London Metal Exchange (LME) averaged at $1,646 a tonne.

These were up two per cent sequentially but down two per cent year-on-year. However, it is alumina, which is refined further to produce aluminium that matters more for Nalco. Prices of alumina averaged at $266 compared to $263 in previous quarter and $308 in the year-on-year quarter. Alumina sales volumes at 291,000 tonnes were also flat sequentially and 8.6 per cent lower year-on-year. Operating performance, too, was hit with higher fuel oil and effective coal costs due to higher moisture content in coal during the monsoon season.

 

Thus, the alumina segment’s earnings before interest and tax declined to Rs 147 crore compared to Rs 214 in the previous quarter and Rs 332.51 crore in the year-ago three-month period.

Nalco’s aluminium production at 94,000 tonnes was also flat and again, higher power costs impacted profitability. Power cost per unit increased by seven per cent sequentially to Rs 3.63/kWh, estimate analysts.

With pressure on profitability and revenues up just 1.7 per cent at Rs 1,846 crore, earnings before interest, taxes, depreciation and amortisation (Ebitda) halved to Rs 172 crore. Net profit at Rs 121 crore also halved from Rs 250 crore in the year-ago quarter, and was down 10 per cent sequentially.

With this, the stock also corrected nearly seven per cent post results to Rs 61.60 on Friday.

The bad news, however, ends here as the company is expected to see better performance in the coming quarters. For one, the firm is concentrating on alumina. Thus, alumina volumes are seen rising, which comes at a time when alumina prices are surging (already moved up from $220 to $330 a tonne). Rising volumes also bode well for economies of scale, as coal prices benefit from fixed price contracts for coal, say analysts at Motilal Oswal, who believe 100 per cent captive alumina sourcing is positive for aluminium business.

A similar thought is echoed by analysts at Kotak Securities, who say that the uptick in the aluminium prices and a sharp up-move in alumina price after Q2 of FY17 would aid Nalco’s earnings in the near term.

Even as the company is cutting unviable aluminium capacities and delaying investments in nuclear power joint venture, it is aiming to up its overall aluminium production gradually from 372,000 tonnes in FY16 to 441,000 tonnes by FY18 led by better smelter utilisation.

Higher volumes would deliver better cost absorption with fixed cost remaining at $600 a tonne, say analysts at Motilal Oswal.

Given the year-to-date gains, analysts believe the stock is fairly valued and further gains will be driven by metal and alumina prices.