The Economic Times
Aluminium prices, coal shortage a dampener for Nalco
Edited by : AL CIRCLE
2 min read
State-run Nalco's per share earnings for the July-September quarter reduced by a third compared to a year ago as the company's operating expenses rose almost 30% and the lack of availability of coal compelled the aluminium producer to cut down production at its Angul unit in Orissa, thereby curtailing its sales volume for the quarter.
Moreover, Nalco was forced to import coal to meet its requirements due to the shortage of coal. With flooding at some sites and logistical issues during the monsoon, Coal India was unable to meet the demand of its buyers.
That meant Nalco had to buy power from the Orissa state grid and import coal to meet the rest of its requirement and ended up paying 32% more for raw materials than it did in the year ago period. This hurt its operating profit margin by 1400 basis points.
What did not work in Nalco's favour during the last quarter, and will continue to weigh on its earnings, is the drop in the selling price of aluminium. Globally, aluminium prices have fallen 23% from the peak in April 2011. Though realisations were better, lower demand for aluminium resulted in a meagre 9% growth in sales to Rs 1,613.93 crore for Nalco in the September quarter. Profit declined 38% to Rs 139.34 crore as power shortages cost the company a loss of 6,000 tonnes of metal production.
Given the uncertainty in the pick up of global demand for aluminium in the near term, international prices of the base metal are not likely to rise significantly, keeping margin growth and profit growth in check over the next few months. The company's operating profit has been under strain over the past nine months already and has taken a severe beating from investors as well.
The Nalco stock has fallen 43% since January 2011 and at Rs 55, it is available at 7.7 times its trailing 12 months' earnings per share. Compared with its peers in the private sector, the stock is fairly valued. Given the problems it is facing with regard to coal shortages, investors will be better off staying away from the stock for now, even though the company has stated that production will return to normalcy by December.
In the current quarter, an increase in alumina volumes can be expected following the commissioning of additional capacities at Damanjodi in Orissa.
Moreover, Nalco was forced to import coal to meet its requirements due to the shortage of coal. With flooding at some sites and logistical issues during the monsoon, Coal India was unable to meet the demand of its buyers.
That meant Nalco had to buy power from the Orissa state grid and import coal to meet the rest of its requirement and ended up paying 32% more for raw materials than it did in the year ago period. This hurt its operating profit margin by 1400 basis points.
What did not work in Nalco's favour during the last quarter, and will continue to weigh on its earnings, is the drop in the selling price of aluminium. Globally, aluminium prices have fallen 23% from the peak in April 2011. Though realisations were better, lower demand for aluminium resulted in a meagre 9% growth in sales to Rs 1,613.93 crore for Nalco in the September quarter. Profit declined 38% to Rs 139.34 crore as power shortages cost the company a loss of 6,000 tonnes of metal production.
Given the uncertainty in the pick up of global demand for aluminium in the near term, international prices of the base metal are not likely to rise significantly, keeping margin growth and profit growth in check over the next few months. The company's operating profit has been under strain over the past nine months already and has taken a severe beating from investors as well.
The Nalco stock has fallen 43% since January 2011 and at Rs 55, it is available at 7.7 times its trailing 12 months' earnings per share. Compared with its peers in the private sector, the stock is fairly valued. Given the problems it is facing with regard to coal shortages, investors will be better off staying away from the stock for now, even though the company has stated that production will return to normalcy by December.
In the current quarter, an increase in alumina volumes can be expected following the commissioning of additional capacities at Damanjodi in Orissa.
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