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Weak outlook for Nalco

Aluminium business will continue to be a drag for the company

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Nalco’s stock has seen high volatility during FY12, trading between 52-week high of Rs 94 (June 2, 2011) and 52-week low of Rs 48 (November 24). While international prices have been under pressure due to the global crisis, lack of backward integration (coal) added to the woes. Coal availability in India has not been good, and imports are also proving costly despite the decline in global prices, thanks to the rupee’s depreciation. The company was forced to close 120 of its 930 pots due to non-availability of coal during the September 2011 quarter, which have not restarted yet. It hopes to restart these after coal availability improves and aluminium prices support profitability.

While these events impacted Nalco’s profitability in 2011-12, there is some solace that the March 2012 quarter numbers were better on a sequential basis.

added 525,000 tonnes to alumina capacity during September 2011 quarter that pushed annual alumina capacity to 2.1 million tonnes and boosted volumes in March quarter. Alumina production at 510,000 tonnes was 30 per cent higher, as compared to the December quarter. Aluminium sales volume at 104,000 tonnes, too, increased six per cent sequentially.

Profitability and revenues were further helped by a marginal improvement in average alumina and aluminium prices (at $377 and $2,226 a tonne, respectively) up more than five per cent sequentially. Thus, revenues (Rs 1753.4 crore) were up 22.6 per cent sequentially. Better availability of linkage coal and lower use of e-auction coal (seven to eight per cent in the quarter versus 15 per cent in the December quarter) saw power and fuel costs fall thereby boosting profitability. Employee expenses too reduced, aided by some reversals. This helped Ebitda margins improve sharply from 3.2 per cent in December 2011 quarter to 15.7 per cent in March; net profit jumped 450 per cent to Rs 238 crore.

The expanded alumina capacity will run to optimum levels pushing Nalco’s profitability. Cost of production for alumina is around $250 a tonne (average quarterly alumina prices during FY12 ranged $358-488). However, cost of production for aluminium is around $2,250-2,300 a tonne for Nalco, whereas aluminium prices on LME are likely to hover between $2,100-2,300 a tonne in the near term, say analysts. After assuming the typical premium of about $200 a tonne that companies garner for their produce, the aluminium business will continue to be a drag for Nalco. Further, benefits from will take time to accrue. Hence, most analysts remain bearish on the stock, even as it (at Rs 59.55) is closer to its 52-week low levels.

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