Investors in state-run firms have been a disappointed lot in recent times. National Aluminium Co. Ltd was the latest to shock them with a poor set of numbers for the September quarter. Earlier, Coal India Ltd and Hindustan Copper Ltd reported disappointing results.
Nalco’s shares fell 7.8% as investors grappled with a 50.6% decline in operating profit from a year ago, on top of a 4.2% decline in sales. That does not seem like the results you would expect from a firm when non-ferrous metal prices are on the upswing.
Nalco’s business is slightly different from other aluminium firms as it earns profits from selling alumina that is processed further to get aluminium. There is a merchant market for alumina, which is sold to companies that refine it to make aluminium.
In fact, Nalco’s aluminium business did relatively well with its segment loss coming in at Rs99.9 crore against Rs107.9 crore a year ago. Even in the June quarter, its loss was Rs105.95 crore. While it continued to make losses, they were lower.
Alumina, however, saw a sizeable cut in profits of 55.6% from a year ago and fell sequentially, too. The firm’s material cost rose; the main culprit was higher energy costs, which rose 7.2% over a year ago and by 4.8% sequentially. Energy costs are critical as they account for about one-third of total costs. Operating profit margin narrowed by 8.8 percentage points from a year ago and by 2.3 percentage points sequentially. That explains the sharp reaction by investors to its results.
Nalco’s ability to increase aluminium output will be one factor to watch for. In the September quarter, provisional government data indicates output fell 1.4% from a year ago. October saw a sequential 5% growth, which is a good sign if it can be sustained. On the alumina front, a Motilal Oswal research note says, sales were flat sequentially, but operating cost was higher probably due to higher fuel oil prices and higher effective cost of coal (due to higher moisture content). But the note says alumina business profitability is expected to improve on the back of higher prices.
Although Nalco’s profit fell from a year ago, earnings per share did not fall as much due to the company’s share buyback. However, other income will decline in the coming quarters as its cash balance has declined due to the buyback. An improving trend in price realizations for its products is good news. But imports remain a threat and, unlike steel, no support from the government is forthcoming. Nalco’s ability to improve output and keep energy costs under check will determine how it does in the rest of FY17. Even after Thursday’s fall, its share is up 24% from a month ago.