Better coal supplies, lower input costs to make Nalco profitable again

Topics Nalco | Coal Supply

Representative image | Nalco is dependent on MCL to source coal for the Angul captive power plant
Improvement in coal supplies, sobering costs of critical inputs like caustic soda, coal tar pitch and calcined petroleum coke and an anticipated strengthening in alumina prices would help National Aluminium Company (Nalco) stage a rebound in profits, analysts said.

For the quarter ended December 31 2019, Nalco posted its second straight quarterly loss.

“The company had to battle business headwinds in the form of softening international alumina prices and acute coal crunch in the domestic market. This led to spike in costs of metal production that reflected in the company’s earnings, pushing Nalco to rare back-to-back quarterly losses”, said a metals-focused analyst.

In the last financial year, buoyant alumina prices had helped Nalco report its best ever profit in a decade. The navratna company exited 2018-19 with a record profit of Rs 1,732 crore as the strategy to sell its entire surplus alumina at spot markets shored up the company’s bottomline. However, alumina prices have almost halved to hover around $300 per tonne compared to last year, crimping margins for Nalco. Besides this, intermittent disruptions at mines in the command area of Mahanadi Coalfields Ltd (MCL), a subsidiary of Coal India Ltd (CIL), triggered coal shortage, goading Nalco to buy pricier power from the Odisha grid.

However, a turnaround in the performance of the central public sector enterprise (CPSE) is on the cards.

“We believe alumina/aluminum LME (London Metal Exchange) prices are close to bottom, as at the current levels – several global smelters/refiners (particularly Chinese) would be in cash losses. We thus believe that there is scope for prices to recover. Nalco is best placed to benefit from higher prices. Improved coal availability, lower input costs (caustic soda, coal tar pitch and calcined petroleum coke) and a recovery in alumina prices would drive a rebound in profits. We maintain our positive stance on Nalco considering its integrated business model, high cash levels and attractive dividend yield”, leading brokerage firm Motilal Oswal noted in a report on Nalco’s performance.

Nalco’s officials were not immediately available for comments.

The CPSE posted loss before taxes of Rs 53.22 crore for the quarter ended December 31, 2019 as against a profit before tax of Rs 470.05 crore it registered in the comparable period of FY19.

Nalco's net loss (after taxes) stood at Rs 33.96 crore in Q3 of FY20, the company's steepest since it started commercial operations. In the same period of FY19, the navratna company had recorded Rs 301.76 crore net profit.

The aluminium maker’s Q2 and Q3 performance was affected by the sharp increase in power and fuel costs as a result of lower coal supplies from the MCL. Nalco is dependent on MCL to source coal for the Angul captive power plant. Supplies from Mahanadi, however, got disturbed from Q2 of FY20 due to heavy monsoon and labor strikes, which required Nalco to purchase power externally and curtail aluminum production. Unlike its peers Hindalco Industries and Vedanta Ltd, Nalco doesn’t fall on imported coal supplies.

“With Talcher mining operations normalized now, coal supply to Nalco has improved which should reduce power & fuel cost”, the report by Motilal Oswal added.

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