Nalco plans to venture into power sector

National Aluminium Co., India’s largest state-run producer plans to invest $2 billion to generate and sell electricity after a slide in metal prices shrank profit margins to the smallest in at least 12 years.

“All our calculations with aluminum have gone wrong,” Chairman B.L. Bagra said in an interview in New Delhi. “We’re now betting big on power, which gives us the comfort that some of those projects have an assured return on equity.”

The company, which has 50 billion rupees ($895 million) of cash, is seeking to revive earnings that fell in four of the past five years as energy costs climbed and aluminum prices slumped. Almost 20 percent of the metal produced in China and about 30 percent in the rest of the world is unprofitable, Goldman Sachs Group said in a July 3 report, as three-month contracts on the London Metal Exchange dropped 25 percent in the past year on slowing demand in Europe and China.

Nalco, as the aluminum maker is known, will form ventures to build nuclear and thermal plants in the next five years, taking advantage of the growing demand for power in the South Asian country, Bagra said. The company currently operates a 960- megawatt plant to run its 345,000 tons-a-year smelter in the eastern state of Odisha.

Profit margin for the year ended March 31 shrank to 13.07 percent. Full-year net income declined 21 percent to 8.5 billion rupees after energy costs gained 23 percent. The company made a loss of 162 million rupees on sales of aluminum, according to a statement to the stock exchanges.

Prime Minister Manmohan Singh’s government aims to create 76 gigawatts of generation capacity in the next five years to bridge an 8.6 percent peak-demand shortfall and revive economic growth from the slowest pace in nine years. Nalco will partner with Nuclear Power Corp. of India Ltd. to build a 1,400-megawatt plant in the western state of Gujarat, Bagra said, without giving a timeline. The maker of the lightweight metal will also seek to join three other state-run companies to bid for a 4,000 megawatt thermal power project. Nalco will hold 49 percent of the Gujarat plant and about 25 percent in the project to be set up in either Odisha or Chhattisgarh state, he said.

“Just as we are an aluminum producer, we are also a miner and a power producer,” Bagra said. “We’re going to make good of our experience in these two areas and diversify.”