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NALCO (NALU.BO): Reiterate Sell on expensive valuations
Despite recent underperformance, we continue to reiterate Sell on NALCO as we believe
NALCO’s current valuation at 2.1X FY11E P/B (compared with sector average of 1.7X) does
not justify its fundamentals (ROE: 12% vs. 17% for the sector).
Periodic disruptions of coal supply to its captive power plant continues to be an area of
concern, implying sustained higher power and fuel costs as NALCO has to depend on
higher cost coal imports to meet its requirements (as reflected in 2QFY11 results).
We revise up our FY2011E-FY2013E EPS estimates by 0.2%-8% on higher aluminum/
alumina prices. Subsequently, we revise up our 12-month target price to Rs365 (from
Rs362), implying 10% potential downside. We believe the current valuations are not
justified given weak aluminum fundamentals and execution issues. Key risks include
higher-than-expected aluminum prices and potential divestment of stake by the
Government of India.
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