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National Aluminium Co. (NACL), India’s largest state-run producer, plans to invest $2 billion to generate and sell electricity after a slide in metal prices shrank profit margins to the smallest in at least 12 years.
“All our calculations with aluminum have gone wrong,” Chairman B.L. Bagra said in an interview in New Delhi. “We’re now betting big on power, which gives us the comfort that some of those projects have an assured return on equity.”
The company, which has 50 billion rupees ($895 million) of cash, is seeking to revive earnings that fell in four of the past five years as energy costs climbed and aluminum prices slumped. Almost 20 percent of the metal produced in China and about 30 percent in the rest of the world is unprofitable, Goldman Sachs Group said in a July 3 report, as three-month contracts on the London Metal Exchange dropped 25 percent in the past year on slowing demand in Europe and China.
Nalco, as the aluminum maker is known, will form ventures to build nuclear and thermal plants in the next five years, taking advantage of the growing demand for power in the South Asian country, Bagra said. The company currently operates a 960- megawatt plant to run its 345,000 tons-a-year smelter in the eastern state of Odisha.
“Nalco has a lot of cash and if they can invest that cash in something that gives an assured return on equity, it certainly is a good strategy,” Chirag Shah, an analyst at Barclays Plc in Mumbai. “The problem is most of it is still on paper and until there is something on the ground, it doesn’t make much sense to investors.”
Profit margin for the year ended March 31 shrank to 13.07 percent. Full-year net income declined 21 percent to 8.5 billion rupees after energy costs gained 23 percent. The company made a loss of 162 million rupees on sales of aluminum, according to a statement to the stock exchanges.
Nalco gained as much as 1.5 percent to 62.70 rupees and traded at 62 rupees as of 9:23 a.m. in Mumbai. The shares have declined 25 percent in the past year, the most in at least 13 years. Nineteen of 28 analysts tracking Nalco recommend investors sell the shares, while six recommend holding the stock. Three analysts have a “buy” rating.
Prime Minister Manmohan Singh’s government aims to create 76 gigawatts of generation capacity in the next five years to bridge an 8.6 percent peak-demand shortfall and revive economic growth from the slowest pace in nine years. Gross domestic product rose 5.3 percent in the quarter through March from a year earlier, government data show.
Nalco will partner with Nuclear Power Corp. of India Ltd. to build a 1,400-megawatt plant in the western state of Gujarat, Bagra said, without giving a timeline. The maker of the lightweight metal will also seek to join three other state-run companies to bid for a 4,000 megawatt thermal power project. Nalco will hold 49 percent of the Gujarat plant and about 25 percent in the project to be set up in either Odisha or Chhattisgarh state, he said.
India increased the assured return on equity on power projects from 14 percent to 16 percent in 2009 to encourage investments and meet a goal of providing electricity to all households. The shortfall between demand and supply in April- June fell from 8.9 percent a year earlier, according to the power ministry’s Central Electricity Authority.
The Central Electricity Regulatory Commission, India’s regulator for power, allows power producers to charge a tariff based on the capital and fuel costs of projects set up without competitive bidding.
Nalco is also in talks with Nuclear Power Corp. for a second plant, Bagra said, without giving details. Nalco aims to invest 34 billion rupees through equity in the power plants, while the debt will be raised by the separate units set up for the projects.
“The good thing for Nalco will be to remain invested in aluminum and simultaneously build a power portfolio to tap demand,” said Ravindra Deshpande, a Mumbai-based analyst with Elara Securities Ltd. While the current cost structure and prices make the aluminum business unattractive, things will not always remain so, said Deshpande, who has an “accumulate” rating for the stock.
India’s government plans to sell 10 percent in Nalco to raise $273 million, Thomas Mathew, joint secretary for capital markets at the finance ministry, said June 18, citing a ministry document. Singh plans to raise 300 billion rupees selling assets in the year ending March 31 to pay for subsidies and provide for healthcare, jobs and food security.
Nalco shut 10 percent of its aluminum smelting capacity in October last year after coal supplies to its power plant from Coal India Ltd. were disrupted. Electricity accounts for as much as 40 percent of the cost of smelting aluminum.
A shortage of thermal coal in India has prompted Nalco to seek the fuel in overseas markets, although with little success. A $4 billion aluminum smelter venture with the Indonesian government has yet to start construction after Nalco failed to secure a supply accord with MEC Coal Pte for the project in east Kalimantan province. The project, slated to start output in 2017, will be delayed by at least a year, Bagra said.
An earlier quest to set up a smelter in South Africa also failed because of lack of coal supplies, Nalco said in November 2009. The company is pursuing plans to build a smelter in Iran should it succeed in tying up bank loans for the project, Bagra said, without elaborating.
Nalco, which also plans to foray into mining for gold and copper, is part of a four-member group of Indian state-run companies bidding for deposits in Afghanistan.
“Just as we are an aluminum producer, we are also a miner and a power producer,” Bagra said. “We’re going to make good of our experience in these two areas and diversify.”
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