The stock of Government-owned aluminium producer National Aluminium Company Ltd (Nalco) was up 3 per cent on Thursday, after a strong performance in June quarter.

The company’s net profit jumped 69 per cent compared to the same period last year, despite a modest 8 per cent growth in revenue. This was thanks to its aluminium segment turning profitable in the June quarter. The company’s net profit went up by nearly 60 per cent over the March 2014 quarter to Rs 271 crore.

Aluminium segment

The company’s aluminium segment, which has been loss-making over the last two years, reported a profit of ₹31 crore in the June quarter. This was against a loss of ₹53 crore compared to the same period last year.

Global aluminium prices, which have shot up to over $2,000 per tonne from the low of $1,693 in February 2014, have likely aided the turnaround in the segment.

Lower expenses, higher other income

Nalco’s earnings also got a fillip from lower expenses and higher other income. The company’s fuel cost as a percentage of revenue decreased to 27 per cent from 33 per cent compared to the same period last year. One likely reason for the lower fuel cost could be the higher share of alumina sales in the company’s revenues.

The company adopted a new accounting method for depreciation which led to lower depreciation costs in the June quarter. The switch in accounting method was as per the new regulation in the Companies Act 2013.

Sanguine outlook

Nalco’s share price has nearly doubled in the last few months due to a sanguine outlook on global aluminium prices. But, there may be a few challenges ahead.

For one, profit pick-up in the aluminium segment depends on the availability of low-cost fuel as power accounts for nearly 40 per cent of the aluminium production costs.

The recent Budget proposal to double the clean energy cess on coal may increase input costs. Nalco’s attempts to use its cash (₹4,050 crore as of March 2014) to acquire foreign coal block assets or put up smelter abroad have not been successful so far.

Also, the revision of royalty rates on extracted ore, paid to state governments, may dent the profits. Additionally, higher export duty imposed by the Government, will likely discourage ore export.

Nalco’s alumina ore sale, which is a high margin business, has been on a rise in the last few years. Profit margin may come under pressure due to lower share of ore export business.

The Government’s 81 per cent stake in the company will have to be brought down to 75 per cent to comply with SEBI’s mandate. This may continue to be an overhang on the stock.

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