Wednesday, December 30, 2015

Nalco: Down but not out

Stocks of metal producers have been losing lustre in the past year due to a glut from falling demand, mainly from China and many private metal and mining companies are saddled with high debt. However, State-owned companies offer opportunities for a long-term investor. One good option is the stock of aluminium maker National Aluminium Company (Nalco).

The stock price has fallen over 30 per cent in the past year and currently offers a dividend yield of about 4.5 per cent (based on 2014-15 dividend per share of Rs.1.75).

The company’s dividend payout was 34 per cent of profits in 2014-15. The price discounts the company’s trailing 12-month earnings by about nine times. This is cheaper than Hindalco (trading at over 20 times) and the company’s three-year range of 10-12 times.

Compared to the nearly 80 per cent drop in iron ore prices from the peak levels seen five years ago, aluminium has held up better. Prices are trading at about $1,500 a tonne, down 45 per cent in the same period. One likely reason for the relative price stability is supply reduction. Unlike mined ores such as iron, aluminium requires refining and smelters are shuttered when prices fall below production cost, supporting prices.

Nalco’s high-grade bauxite ore mines help the company to produce low-cost alumina — the raw material for making aluminium. Alumina prices have been relatively stable — down about 7 per cent in the last year to $300 a tonne currently. Margins in this segment improved to over 31 per cent in the September quarter, compared to about 29 per cent in the same period last year. Overall sales and profits are down 10 per cent and 36 per cent, respectively, in the first half of 2015-16, but alumina sales could continue to aid revenue and profit until aluminium realisations improve.

As local sale price in rupee is linked to global prices, any currency weakness will aid Nalco’s revenue.

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