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Diversified Returns

With a strong foundation, the company has looked for gains in other spheres too

Profile
National Aluminium Company (NALCO) is into mining of bauxite and manufacture of alumina, aluminium hydrates and aluminium metal. Its other core operations span generation of electricity via captive power generation plants at its 5 operating units. Currently, it generates around 960 MW of electricity and has plans to increase it to 1,200 MW.

It has tied-up with the Nuclear Power Corporation of India (NPCIL) for an entry into the nuclear power generation business too. The idea behind it is that NALCO wants to de-risk itself from the aluminium business. According to the company, the recession has squeezed its bottom line, and by hedging risks, it would be able to ride out the aluminium price cycles successfully.

Fundamental Performance
NALCO’s performance is too linked to the cyclicality of aluminium prices. For the past three years its profits have decreased annually at the rate of 6.6 per cent, even though during the same period sales have gone up. Falling prices squeezed the margins of the company.

NALCO has more than Rs 3,700 crore as cash reserves i.e. on a per share basis this is equivalent to Rs 58 per share. With no debt, it has a strong balance sheet, despite falling profitability. Its current dividend payout ratio is 30 per cent, quite impressive considering the industry situation. With its upcoming diversification plan and existing capacity build-up, it is well-poised to take advantage of upsides in the aluminium prices as the commodity cycle turns around.

Stock Performance
The stock has tested the patience of investors over the past 3 years. Its annualized rate of return is 18.83 per cent, which on a standalone basis might look handsome, but considering the broad market movements it might have disappointed investors. The stock is currently trading at 25 times its trailing profits. Compared to this, Hindalco, the market leader, is trading at a PE of around 13. The stock has run ahead on expectations of a dilution of government stake.

History
NALCO was formed in 1981 to exploit the  large deposits of  bauxite discovered on the east coast. The Ministry of Mines is the controlling authority of the company.

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Alse see: National Aluminium Company (NALCO)
This article was previously published in October 2009 issue of Wealth Insight