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Wednesday, November 23, 2016

National Aluminium Company (NALCO) Investment Research Report

NALCO Company Logo

National Aluminum Company Limited
Value Investment Analysis Report
23rd November 2016


Basic Filtering Criteria:

Picture shows the market snapshot of the NALCO Share
Market Snapshot of NALCO Share

Critical prima-facie Observations:

  1. PE Ratio: National Aluminum (NALCO)’s PE Ratio is 14.33 is marginally below the maximum permitted 15 and well above the Ideal for Indian conditions of 10 and therefore though passes the hurdle does not bestow any special advantage.
  2. Price to Book Value Ratio: Placed one-third below the maximum recommended 1.50 times the book value, at 1.04. However presently there is no opportunity to buy the assets at a discount.
  3. Distance from 52 week low: The current price of Rs.52 is 76.43% away from the 52 Week Low of Rs.29.30. On this parameter the scrip is NOT in the attractive zone – rather it is very near the 52 Week High of Rs.56.65.
  4. Dividend Yield: Again at just acceptable at 3.85%, slightly below the recommended minimum four to five percent and above.


In light of the above conditions, National Aluminium (NALCO) shall cautiously be accepted for further study.



A. Company Performance

Profitability Analysis


National Aluminum Company Ltd. (NALCO)
Profit and Loss Account
Rs. in Crores (10 Millions)
March 31' 2013
March 31' 2014
March 31' 2015
March 31' 2016
Net sales
6,916.48
6,780.85
7,382.81
6,816.00
 % age rise (+) or fall (-)
4.61%
-1.96%
8.88%
-7.68%
Cost of sales:




Raw materials
1,167.83
1,063.16
1,031.59
1,104.40
Intermediaries & WIP
-64.25
58.55
2.90
-8.99
Power and fuel
2432.27
2017.67
1802.24
1864.61
Employee Benefit Expenses
1153.93
1245.33
1377.91
1361.37
Other Expenses
1319.83
1461.94
1462.15
1556.60
Depreciation
505.43
524.73
413.66
424.09
Interest
7.45
0.00
1.21
1.21
Total Expenses
6522.49
6371.38
6091.66
6303.29
EBT
 393.99
 409.47
1,291.15
 512.71
Net of other non-operating income/expenses
 511.05
 508.34
 821.06
 684.06
Profit Before Tax
905.04
917.81
2112.21
1196.77
Provision for taxes
312.21
275.46
791.57
731.03
Profit After Tax (PAT)
592.83
642.35
1320.64
465.74
EBDITA
906.87
934.20
1706.02
938.01
EBDITA (Operating Profits) %
13.11%
13.78%
23.11%
13.76%
Depreciation
 505.43
 524.73
 413.66
 424.09
Interest
7.45
0.00
1.21
1.21
Interest Cost to Sales - %
0.11%
0.00%
0.02%
0.02%
EBT
393.99
409.47
1291.15
512.71
EBT %
5.70%
6.04%
17.49%
7.52%
Net Non-Operating Income
511.05
508.34
821.06
684.06
FINAL PBT
905.04
917.81
2112.21
1196.77
FINAL PBT %
13.09%
13.54%
28.61%
17.56%
Income Tax
312.21
275.46
791.57
731.03
PAT
592.83
642.35
1320.64
465.74
PAT %
8.57%
9.47%
17.89%
6.83%


Remarks:
  1. NALCO’s profitability margins in the recent years have been decent, at best. We must note that globally commodity prices have been hammered in the recent years over recession world over and slowdown in China. In 2008, when the world economy was at the peak, NALCO’s EBDITA margin was 45.04% and PAT margin was 31.78%. Therefore, we can expect improvement in margins with the pick-up in global economy.
  2. One good factor is that the company is debt free. This has saved the NALCO in the present tough economic conditions. If not NALCO could be suffering losses.

To conclude, NALCO is recommendation for inclusion with expectation of improvement of margins in future over economic pick-up and consequent price increase

Balance Sheet Analysis:

National Aluminum Company Ltd. (NALCO)
Balance Sheet
Rs. in Crores (10 Millions)
March 31' 2013
March 31' 2014
March 31' 2015
March 31' 2016
LIABILITIES




Short term borrowings
 -  
 -  
 -  
 -  
Sundry creditors
 503.56
 531.12
 455.46
 581.38
Short Term Provisions
162.67
147.25
186.21
277.43
Other Current Liabilities
2545.70
2564.38
1325.37
1350.77
Total Current Liabilities
 3,211.93
 3,242.75
 1,967.04
 2,209.58
Term loans

 -  
 -  
Deferred Tax Liability
903.13
910.13
1105.27
1110.09
Long Term Provisions
208.62
218.22
242.76
223.72
Other long term liabilities
70.82
54.96
65.30
69.47
Total Term Liabilities
 1,182.57
 1,183.31
 1,413.33
 1,403.28
Total Outside Liabilities (TOL)
 4,394.50
 4,426.06
 3,380.37
 3,612.86
Ordinary share capital
1288.62
1288.62
1288.62
1288.62
Reserves & Surplus
10643.83
10833.83
11508.68
11627.88
Net Worth
 11,932.45
12,122.45
 12,797.30
 12,916.50
Total Liabilities
 16,326.95
16,548.51
 16,177.67
 16,529.36
ASSETS




Cash and bank balances
3504.38
4048.29
4627.98
4944.11
Short-term Investments
1329.02
1244.00
950.00
66.00
Receivables
 142.99
 243.57
 120.82
 235.21
Inventory
1380.64
1173.66
1165.56
1126.97
Other current assets
 718.78
 716.68
 847.82
 820.36
Total Current Assets
 7,075.81
 7,426.20
 7,712.18
 7,192.65
Fixed Assets-Net Block
6523.80
6688.80
6509.21
6328.90
Capital Work in Progress
1001.92
768.74
549.73
662.14
Total Fixed Assets
7525.72
7457.54
7058.94
6991.04
Non Current Investments
 161.04
 1.04
 1.04
 810.03
Long Term Loans & Advances
1422.80
1517.27
1221.85
1347.55
Other Non Current Assets
36.49
43.32
90.77
49.48
Total Other Non-Current Assets
 1,620.33
 1,561.63
 1,270.34
 2,207.06
Intangible Assets
105.09
103.14
136.21
138.61
Total Assets
 16,326.95
16,548.51
 16,177.67
 16,529.36
Tangible Net Worth
 11,827.36
12,019.31
 12,661.09
 12,777.89
Net Working Capital
 3,863.88
 4,183.45
 5,745.14
 4,983.07
Current Ratio
 2.20
 2.29
 3.92
 3.26
Total Outside Liabilities/ Tangible Net Worth (TOL/ TNW)
 0.37
 0.37
 0.27
 0.28
Total Term Liabilities/Tangible Net Worth
0.10
0.10
0.11
0.11


Highlights:
  1. NALCO fortunately is debt-free.
  2. Current ratio is very healthy at 3.26 as against minimum recommended two.
  3. TOL/ TNW ratio is very healthily at 0.28 as against less than 3.
  4. Long-term Deb-Equity ratio is attractively far less than the recommended not more than One.


Therefore on the balance sheet front all parameters are very positive.

Dividends

Distribution of net Profits

Let us study the dividend distribution pattern of NALCO:
Rs. in Crores (10 Millions)
March 31' 2013
March 31' 2014
March 31' 2015
March 31' 2016
Dividend (Including Dividend Distribution Tax)
221.06
515.48
506.50
542.74
Dividend % of PAT
37.29%
80.25%
38.35%
116.53%
Dividend % of Nominal Value of Share
17.15%
40.00%
39.31%
42.12%

The above table shows that the company has been generously distributing minimum about 35% of the net profits as dividends. On this count the company performance very excellent.

Uninterrupted Dividend Payment History
Year
Effective Date
Dividend Type
Dividend(%)
30/05/2016
27/09/2016
Final
15%
08/03/2016
23/03/2016
Interim
25%
01/06/2015
18/09/2015
Final
10%
09/03/2015
18/03/2015
Interim
25%
28/05/2014
12/09/2014
Final
8%
13/02/2014
05/03/2014
Interim
22%
27/05/2013
20/09/2013
Final
10%
18/03/2013
26/03/2013
Interim
15%
21/05/2012
03/08/2012
Final
2%
09/03/2012
22/03/2012
Interim
18%
30/05/2011
16/09/2011
Final
10%
20/01/2011
07/02/2011
Interim
20%
09/08/2010
27/08/2010
Final
10%
05/03/2010
23/03/2010
Interim
15%
03/06/2009
04/09/2009
Final
15%
28/01/2009
12/02/2009
Interim
35%
2008
13/02/2008
Interim
70%
2007
50%
2006


50%
2005


40%
01/07/2004
22/09/2004
Final
40%
23/06/2003
29/08/2003
Final
60%
12/07/2002
19/09/2002
Final
40%
11/07/2001
04/09/2001
Final
40%
2000


20%
02/08/1999
Final
12%
19/08/1997
Final
8%
The above table shows uninterrupted dividend payment for the last 18 years. It skipped paying in 1998.

On the dividends front National Aluminium has, except for skipping in 1998, which is not easily forgivable, a good track record.




Dividend Yield:
Dividend Yield, is a combination of both the company’s dividend policy and performance as well as market condition. A yield of 3.85% is marginally lower than the minimum 4%. The real culprit is not the company paying less but the market price of the share being high.



Five-year price graph:

Graph shows the price movements of NALCO Share in last five years
Share price movement of NALCO Share in last five years

The graph above shows that the stock price of NALCO having dipped to about Rs.30 in February 2016 to has recovered steeply to Rs.52 and is not in any especially favourable condition.

Five years returns (price rise):

Table shows the Share Price increase percentage (return) of NALCO Share in last 5 years
Price Return of NALCO Share in 5 years

The five years return of -3.17% indicates that the price of the scrip gone back to almost the same level at which the price stood five years ago, whereas the book value of the share has grown 35% during the same five year period. has appreciated that much in the past five years and therefore there is some special benefit here. Of course, if the five year return had been say -50% would have meant a bonanza.


Distance from 52 Week Low:
52 Week Low: Rs.29.30
52 Week High: Rs.56.65
Current Market Price (CMP) on 22nd November 2016: Rs.52

The current price of Rs.52 is 76.43% away from the 52 Week Low of Rs.29.30. On this parameter the scrip is NOT in any specially attractive zone – rather it is very near the 52 Week High of Rs.56.65.

However please note that there is still opportunity for price increase from the present level of Rs.52 on the back of recovery of the global economy and price increase in all commodities, including aluminium.

Final Conclusions:

  1. The above brief analysis proves that National Aluminum is without doubt a good company and that is undergoing market stress and consequently low margins.
  2. PE Ratio of 14.33 is primarily on account low margins and will come down only when commodity prices increase. It is also on account of recent steep price rise of share.
  3. Price to Book Value Ratio (P2BV) of 1.04, though well within below the accepted 1.50, there is no discount opportunity.
  4. The EBDITA, EBT and PAT margins are acceptable.
  5. The company is consistently profitable for many years into the past.
  6. Company has not borrowed money, which is a very prudent policy.
  7. Balance sheet parameters are very strong.
  8. The market condition parameters of five-year price graph and distance from 52 Week low and five year returns do not bestow any special privilege.

Though the company is distributing a good proportion of the profits as dividends, the high market price has pulled down the dividend yield.

Final Investment Advice:

National Aluminium (NALCO) is a good company but presently undergoing price and margins stress. Market conditions are not highly favourable.
Wait for a price correction or buy small quantities. This is not the time for significant investments in this scrip.