The Hindu : Uncertainty dogs Nalco

Online edition of India's National Newspaper
Monday, Dec 30, 2002

Business

Business

Uncertainty dogs Nalco

Nalco has upgraded its processes during the recent expansion and one can say it is technologically more or less on a par with the world leaders.

THE FACES at National Aluminium Company's corporate headquarters in Bhubaneswar exude a compendium of fear, tension and resentment as uncertainty dogs the proposed disinvestment of Government equity in this Central public sector enterprises.

Some months ago, a team from Hindalco, one among the dozen bidders, tried to conduct a due diligence at the company's smelter at Angul. Confronted by angry union activists, it had to precipitately retreat without entering the smelter precincts. From sources in Bhubaneswar I gathered that the union bosses in Angul are prepared to mete out the same treatment to all such teams that may come in future.

Of course, the next team may get an armed escort from the State Government. But how far such an escort will go if it comes to a clash with the union leaders is an open question. The State Government, particularly its Chief Minister, Naveen Patnaik of the BJD party, has publicly come out against the disinvestment. The BJP faction in the ruling coalition, however, has been conspicuously silent. Even at the Centre itself, opinion about disinvestment is split, with Uma Bharati, now Minister for Mines (the administrative ministry for Nalco), making no bones about her opposition to the move.

As of end March 2002, Nalco's paid up equity capital was Rs. 644 crores. The shareholding pattern was: Government of India — 87.1 per cent, institutional investors — 9.72 per cent, private corporate bodies — 1.86 per cent and the rest with the public. The proposed disinvestment of the Centre's holding will comprise 10 per cent in an IPO, 20 per cent through an ADR and 29 per cent to a strategic investor. That will bring the Centre's shareholding to 28 per cent, leaving the strategic investor in management control.

How good a catch is Nalco? The company is just completing an expansion project costing around Rs. 4,000 crores. With this, by November 2003, Nalco will have the following capacities: bauxite mines — 4.8 million tonnes per annum (tpa); alumina — 1.575 million tpa; aluminium — 3.45 lakh tpa; captive power plant — eight units of 120 MW each. As there has been no significant change in aluminium process technology from the time Nalco was established in the 1980s and the company has upgraded its processes during the recent expansion, one can say it is technologically more or less on a par with the world leaders. As per current cost calculations, a greenfield plant of this dimension would cost anywhere between Rs. 13,000 crores and Rs. 15,000 crores.

High quality ore

There are two aspects that are even more attractive about Nalco. It has a well-established captive mine with a huge reservoir of one of the best bauxites in the world, with a low level of silica, which makes for low consumption of caustic soda in making alumina. In fact, Nalco is one of the lowest cost producers of alumina in the world. The alumina produced by Nalco fetches a high premium in the international market.

Although there is plenty of high grade bauxite deposits in the Eastern Ghats, for a new company to establish a mine today, even if environmental clearances are obtained, will be a Herculean task because of the rise of militant anti-mining activism among the tribals of that region, guided by shrewd non-government organisations (NGOs). This is proven by the fact that none of the four companies wishing to put up export-oriented alumina refineries based on ore from this area have managed to start mining in the past six years.

Prior to the advent of Nalco, the global alumina/aluminium market paid hardly any heed to these products from India. It took Nalco's marketing team several years of hard effort to convince foreign buyers about the high quality of its products and today the Nalco brand commands a premium. This goodwill is a high value bonus that Nalco's buyer will get.

Sound financial position

Financially, Nalco is in excellent health. It has been good in capacity utilisation and a constant profit earner. All the foreign loans plus most of the domestic loans were repaid by the late 1990s. However, fresh loans have been incurred since then to finance the current expansion and, at the end of March 2002, Nalco had outstanding loans of Rs. 1,563 crores against a net worth of Rs. 3,225 crores.

The position would have been even better but for the fact that there was a slump in LME (London Metal Exchange) prices in 2001 (average metal price was $1395 a tonne against $1533 in 2000, while calcined alumina fetched only $160 a tonne in 2001 against $200 the previous year).

This led to a drop in Nalco's PAT from Rs. 655 crores in 2000-01 to Rs. 409 crores in 2001-02.

The financial results are better this fiscal, with the profit after tax for April to September 2002 rising to Rs. 217 crores, compared to Rs. 160 crores for the first half of 2001-02. With China importing a lot of alumina to feed its expanding metal capacity, Nalco is getting a good premium for its alumina and can capitalise on its freshly expanded alumina capacity. Metal prices, however, remain more or less on a par with those last year.

Thanks to the management systems and work practices established in the beginning by Pantulu, the second CMD of Nalco and its true architect, this PSE functions almost as tightly as a private company. The workforce numbers have been kept below the 6500 level, so the private sector buyer will not have a burden of getting rid of much fat.

What, however, has kept this company from realising its true potential is the delay in establishing downstream facilities to cash in on value-added products like its competitors in the private sector have done. Only last year it acquired and amalgamated a rolled products unit with a continuous caster (under commissioning) and cold rolling mill (already commissioned).

However, Nalco is a good catch for the strategic investor — provided, of course, that the swayamvar takes place. Till then, the proposed second phase expansion (mine to 6.3 million tpa, alumina to 2.1 million tpa, smelter to 4.6 lakh tpa and captive power plant to ten units of 120 MW each) has to be kept in abeyance.

N. N. Sachitanand

in Bhubaneswar

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