Jitendra Kumar Gupta Moneycontrol Research
Alumina, which is used in making aluminium is in demand as a result of supply disruption in certain parts of the world. The state owned PSU, National Aluminium Company (Nalco), which manufactures aluminium has captive alumina mines. Part of this alumina is used for its captive consumption while the remaining is sold in the open market.
Recently the alumina prices have soared to $520 a tonne as against $400 tonne seen in the month of March this year. For those who do not have captive alumina mines this has become an issue as it becomes an unviable option to produce aluminium at current cost of alumina.
Nalco, because of its captive mines, is in sweet spot on both the counts; higher alumina prices and thus increase in aluminium realisations. All of this had a positive impact on the overall financial performance of the company.
During the quarter, the company posted 65% increase in sales to Rs 2973 crore. While realisations helped to a great extent, volumes were supporting with alumina volumes showing a spike of 24% in the June 2018 quarter. While Alumina business did well, its aluminium business suffered an EBIT loss of close to Rs 210 crore, which was largely due to the transfer pricing of alumina, considering it’s a separate segment or a business with Nalco. Nevertheless, on an overall basis, EBITDA was up by 344% to Rs 1010 crore in June quarter. This is also a reason that adjusted comparable profits saw a 5x jump to Rs 630 crore.
Nalco should continue to make strong growth over the next few quarters and should deliver strong growth in FY19 led by firm alumina prices, increase in production volumes and higher demand for aluminium. At current market price of Rs 72 a share its stock is trading at about 7 times its FY19 estimated earnings, which quite attractive considering the strong earnings growth, cash in the books and dividend yield.
NMDC: Investors may have to live with lower volumes and earnings for next few quarters
It was expected that once the stalled private mines resume operations in Karnataka market share of NMDC would come down. Companies would make use of captive ore and procure from the nearest miner to save on logistics cost. This has already started to reflect, during the quarter ended June 2018, NMDC reported 74% decline on a year on year basis in Karnataka volumes to 0.9 million tonne.
Nevertheless Chhattisgarh dispatches were up by 2% to 6 million tonne and that helped in lowering the damage. Overall volumes during the quarter declined by 26% on a year on year basis. That apart, iron ore realisations were up by about 14% to Rs 3525 a tonne thus r reducing the impact of lower volumes. Factoring this, sales during the quarter declined by about 15% to Rs 2422 crore.
Profitability: less impacted
This also had its impact on the profitability, but because of the lower costs, adjusted EBIDTA saw a relatively lower 8% decline to Rs 2162 crore leading to a marginal 0.6% increase in reported net profits. The trend in profitability could remain subdued for the rest of the quarter particularly on a year on year basis considering the higher base of last year.
While the company is taking corrective measures, this year, the volumes from Karnataka would have a bearing on its profitability. Increasing domestic supply, allocation of captive mines and other factors like imports may keep the pressure on volumes thus also impacting the overall pricing environment and realisations.
But most of this is visible and well reflected in Q1FY19 performance. In fact, the July volumes have been relatively better. Even if this quarter is taken as base, at current run rate of quarterly profits of about Rs 980 crore, one can expect the company to report profits of about Rs 4000 crore. Based on this at current market capitalisation of Rs 33000 crore its stock is trading at 8 times its earnings which is reasonable and offer a dividend yield of close to 4.5%.
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