Nalco: good result, but already priced in

According to a report by Motilal Oswal, aluminium production is expected to remain flat this fiscal, while alumina production may rise in the second half of the year owing to expansion in capacity

National Aluminium Co. Ltd’s (Nalco) results for the March quarter, released late last week, were significantly ahead of estimates. The company reported an adjusted net profit of Rs390 crore for the March quarter against an estimate of Rs280 crore by Motilal Oswal Securities Ltd. Still, the company’s shares have been flat this week, owing to concerns about high valuations and the low likelihood of a repeat performance this fiscal.

Also See Sturdy Metal (Graphic)

The major surprise in the March quarter was the rise in price realizations. The average price realization in the aluminium segment rose by 9% compared with the December quarter, while the average realization for alumina (aluminium oxide) rose by 20% sequentially. Besides, alumina sales rose by 25%, which also drove revenue growth. Ebitda (earnings before interest, tax, depreciation and amortization) margin rose from 21% in the December quarter to 33% last quarter, thanks to the rise in realizations.

According to a report by Motilal Oswal, aluminium production is expected to remain flat this fiscal, while alumina production may rise in the second half of the year owing to expansion in capacity.

In fact, alumina sales will rise materially only in the next fiscal as a result of the brownfield refinery expansion that is expected to complete by the end of this year. Besides, margins are likely to come under pressure due to weakening global prices.

"A lack of material volume growth and high cost of inputs like caustic soda and CPC because of annual contracts, are likely to drag down earnings growth,” the Motilal Oswal report said.

According to a report by Anand Rathi Research, volume growth is likely to be muted for the next three years because of a lack of clarity on other expansion projects.

So even though the March quarter results were very impressive, the outlook is far from exciting. Besides, valuations are expensive at around 23 times estimated earnings for 2010-11.