National Aluminium Company (NALCO) Investment Research Report

National Aluminum Company Limited

Value Investment Analysis Report

23^rd November 2016

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Basic Filtering Criteria:

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:

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):

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 22^nd 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.