Creating A Metallic Road To Wealth : National Aluminium Company Limited
From the days of first commercial operation since 1987 the company has continuously earned profits for the last 34 years and despite the global corona virus pandemic NALCO has posted an impressive net turnover and net profit of ₹ 8,869.29 crore and ₹ 1,299.56 crore, respectively in FY20-21
National Aluminium Company Limited (NALCO) is a Schedule ‘A’ Navratna CPSE established on January 7, 1981 having its registered office at Bhubaneswar. It is one of the largest integrated bauxite-alumina- aluminium- power complexes in the country. At present, the Government of India holds 51.28 per cent of the paid-up equity capital. The company has been operating its captive Panchpatmali bauxite mines for the pit head alumina refinery at Damanjodi in the district of Koraput in Odisha and aluminium smelter and captive power plant at Angul. As a part of its green initiative, NALCO has installed 198 MW wind power plants at various locations in India and 800 kWp rooftop solar power plants at its premises to join hands for carbon neutrality.
From the days of first commercial operation since 1987 the company has continuously earned profits for the last 34 years. Despite the global corona virus pandemic NALCO has posted an impressive net turnover and net profit of ₹ 8,869.29 crore and ₹ 1,299.56 crore, respectively in FY20-21. The company has a 68.25 lakh TPA bauxite mine and 21 lakh TPA (normative capacity) alumina refinery located at Damanjodi in Koraput district of Odisha and 4.60 lakh TPA aluminium smelter and 1,200 MW captive power plant located at Angul, Odisha. The company has regional sales offices in Delhi, Kolkata, Mumbai, Chennai and eight operating stockyards at various locations in the country to facilitate domestic consumers. In addition, NALCO has its own bulk shipment facility for export of products.
Globally, NALCO has achieved the distinction of being the lowest cost producer of bauxite and alumina in the world as per the latest report of Wood Mackenzie. The company was rated second-highest net export earning CPSE in 2018-19 as per the Public Enterprise Survey report. With its consistent track record in capacity utilisation, technology absorption, quality assurance, export performance and posting profits, NALCO is a bright example of India’s industrial capability.
Segment Overview
The Indian aluminium industry mainly consists of primary aluminium, aluminium extrusions, aluminium rolled products and alumina chemicals. The industry meets the requirements of a wide range of industries including engineering, electrical and electronics, automobile and automobile components, etc. Aluminium is the second most used metal in the world after steel with an annual consumption of approximately 65 million tonnes (including scrap). It is also named to be the fastest growing metal which has depicted growth by around 20 times in the last 60 years (compared to 6 to 7 times for other metals). India poses to be the fourth-largest producer of aluminium in the world with a share of around 5.3 per cent of the global aluminium output. The country holds 10 per cent of the world’s bauxite reserves and a growing aluminium sector that leverages this.
Also, India holds a fair advantage in cost of production and conversion costs in alumina. Moreover, development of infrastructure and automotive production are welcoming forward thrusts in this sector within the country. The aluminium sector has recorded healthy returns in certain time periods during the past decade for the investors but overall, the performance of the sector has been observed to be underwhelming. Aluminium stocks bear more risk as their performance is prone to economic booms and busts and hence are often categorised as cyclical stocks. Cyclical stocks can be used to generate high returns when the economy is doing well. Therefore, a suitable time to analyse aluminium industry for investment prospects can be at the start of an economic expansion.
Financial Overview
Considering the performance of the company recorded for the third quarter of FY22, on a consolidated basis the company recorded net sales and other operating income of ₹ 3,773.26 crore which reported a growth of 58.62 per cent from ₹ 2,378.79 crore reported in Q3FY21. On the other hand, the operating profit was recorded at ₹ 1,262.51 crore in Q3FY22, posting a robust rise as compared to an operating profit of ₹ 470.03 crore in Q3FY21. Q3FY22 recorded a net profit of ₹ 830.86 crore in comparison with net profit of ₹ 239.81 crore in the same quarter in the previous year, giving a significant rise.
The results of NALCO were driven by sustained supply of raw material, optimized production, strategic sourcing of power, particularly during the period of coal crisis, better realisation and effective capacity utilisation of its operational units.
"The robust growth and all-round performance on production and financial parameters is testimony towards the strategic focus of the company on production, people and projects."
Despite the challenging circumstances due to the pandemic, the company has displayed resilient performance to record robust growth on the sales and production fronts. During the nine months of the current fiscal year, the company achieved production of 55.03 lakh tonne bauxite compared to 53 .48 lakh tonne during the corresponding period of FY21 and alumina hydrate of 15.41 lakh tonnes against 15.07 lakh tonnes of the previous fiscal.
Aluminium production also registered healthy growth with full capacity utilisation of the smelter plant at 3.43 lakh tonnes produced in the first nine months ending December 2021, in comparison to 3.06 lakh tonnes of FY21. On the annual front, its net sales and operating income grew by 5.71 per cent from ₹ 8,471.84 crore in FY20 to ₹ 8,955.79 crore in FY21. The operating profit advanced by 153.27 per cent in FY21 as compared to FY20 recording at ₹ 1,929.42 crore compared to ₹ 761.81 crore. The net profit ascended significantly in FY21, recording ₹ 1,299.53 crore as compared to ₹ 138.2 crore in FY20.
NALCO also declared a second interim dividend of ₹ 3 per equity share (60 per cent of face value of ₹ 5 per share) for FY 21-22. The first interim dividend of ₹ 2 per equity share was paid in December 2021. The total interim dividend paid during the current financial year calculates 100 per cent of the paid-up equity share capital. On the ratios front, the ROA, ROE and ROCE ratios have improved significantly, giving optimistic indications regarding the company’s performance. Additionally, the numbers of EBIT growth and PAT growth are also observed to be attractive.
Outlook
For India, the aluminium industry is considered a key player in boosting fuel and cost efficiency, especially in the transportation, electrical and electronics and building and construction sector. As per NITI Aayog report of 2018, aluminium will help India to achieve its CO2 emissions target by adopting electric vehicles, which will improve the share of renewable energy to 40 per cent or more. Going forward, India is likely to require additional annual consumption of 16 million tonnes of aluminium, thus making it the second-largest consumer in the world. Even at low consumption, aluminium contributes to 2 per cent of Gross Domestic Product (GDP) in the manufacturing sector (steel 12 per cent, cement 9 per cent) and this is expected to improve with consumption growth.
This growth is critical for India’s industrial vision of achieving 25 per cent of GDP from manufacturing. It can be observed that the metal sector is going through good days currently and the Q3 result of the company has established the efforts and efficiency of how it is translated into profit. The company is quite hopeful regarding the European continent because of the winter power demand that has led to increase in prices. So, the smelters have reduced their capacity production and in China also, due to the pandemic’s severity, the smelters have curtailed their production. Also, the Ukraine-Russia issue has made things uncertain on that front.
For three to five months, the smelters cannot be operated under switch on-switch off mode and it will take some time for produc- tion to resume. So, for the next three to four months, the company predicts that a good price will prevail and the current financial year will end up with good results. The company forecasts a good performance for the coming fourth quarter also and focuses on surpassing past records with reference to profit, turnover and production – both physical and financial parameters.
NALCO achieved an important milestone by bringing 960 pots in smelter complex into simultaneous operation, achieving 100 per cent capacity utilisation for the first time in history of the company during a critical period defying all odds and challenges. The robust growth and all-round performance on production and financial parameters is testimony towards the strategic focus of the company on production, people and projects. The strategic growth-oriented roadmap and the willingness displayed by the company to travel the extra mile in these challenging times are noteworthy. Hence, we recommend BUY.