Nalco must step up output to gain from price rise

Nalco has hardly gained from the rise in aluminium prices, as other input costs (chiefly coal and fuel) and employee expenses weighed down profitability during the March FY11 quarter. Although the company has major capacity expansion plans underway, its dependency on third parties for raw materials is likely to continue to keep margins compressed in the coming quarters.

Nalco's fourth quarter can be considered as one of the slowest in the past six quarters due to flat year-on-year volumes in alumina and aluminium. On an 11% sales growth of Rs 1,787.51 crore, the company earned an operating profit of Rs 453.66 crore, down 9% year-on-year. Raw material costs, which were 33% higher than last year, coupled with a 30% rise in staffing costs caused a 600-point year-on-year decline in the operating profit margin. Net profit fell 18% toRs 305.26 crore.

Nalco earns more than half of its revenue through the production of aluminium. Even though aluminium prices on the London Metal Exchange (LME) gained over 16% during the third quarter due to the higher cost of production on account of higher alumina and fuel costs, the company was unable to pass on the rise to its end users. Since the start of the April-June quarter, base metal prices have corrected, but aluminium has held steady and is expected to sustain at those levels as a result of the cost push from alumina and power. It is essential for Nalco to increase its production to take advantage of the uptrend in aluminium price.