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Nalco – Upgrade to Neutral from Sell on recent underperformance
What's changed
We upgrade Nalco to Neutral from Sell as the stock is now close to our
new 12-month P/B based target price of Rs87, yielding 6% potential
upside. Since we added it to our Sell list on January 21, 2009, Nalco has
risen 78% vs 108% for Sensex.
Earnings leveraged to alumina prices
We revise up our alumina price forecasts (up 5% for FY12E) due to
higher demand from Chinese smelters, driving higher contribution from
the alumina business. In addition, recent completion of the expansion
project will drive a 13% CAGR volume growth in alumina over FY11-13E.
Every 10% increase in alumina prices increases Nalco’s earnings by 6%.
We revise our FY12E-FY14E EPS estimates by up to 9% on higher
commodity price assumptions.
Coal supply to power plant is a concern
Periodic disruption in coal supply to the captive power plant of Nalco,
driven by law and order related issues (actions by locals seeking
compensatory jobs from MCL, a subsidiary of Coal India) remains an
area of concern. This implies sustained higher power and fuel cost as
Nalco has to rely on higher-cost imports or power purchase from the
grid, to meet this shortfall.
Reasonable valuations
In our view, after its recent underperformance led by aluminium prices
and higher coal prices, the risk/reward for Nalco looks balanced relative
to its own trading history. At 1.6x FY12E P/B, in line with the global
average, with 12% ROE compared to global average of 20%. At 6.9X
EV/EBITDA, it is now trading about 8% below its mid-cycle of 7.5x.
We revise down our 12-month target price to Rs87 (from Rs91.25), based
on a lower target P/B multiple of 1.7x FY12E (from 1.9x on lower
earnings/returns), implying 6% potential upside. We upgrade the stock
to Neutral from Sell.
Key risks
Downside: weaker aluminium and alumina prices; Upside: newsflow on
potential divestment of stake by Government of India
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Nalco – Upgrade to Neutral from Sell on recent underperformance
What's changed
We upgrade Nalco to Neutral from Sell as the stock is now close to our
new 12-month P/B based target price of Rs87, yielding 6% potential
upside. Since we added it to our Sell list on January 21, 2009, Nalco has
risen 78% vs 108% for Sensex.
Earnings leveraged to alumina prices
We revise up our alumina price forecasts (up 5% for FY12E) due to
higher demand from Chinese smelters, driving higher contribution from
the alumina business. In addition, recent completion of the expansion
project will drive a 13% CAGR volume growth in alumina over FY11-13E.
Every 10% increase in alumina prices increases Nalco’s earnings by 6%.
We revise our FY12E-FY14E EPS estimates by up to 9% on higher
commodity price assumptions.
Coal supply to power plant is a concern
Periodic disruption in coal supply to the captive power plant of Nalco,
driven by law and order related issues (actions by locals seeking
compensatory jobs from MCL, a subsidiary of Coal India) remains an
area of concern. This implies sustained higher power and fuel cost as
Nalco has to rely on higher-cost imports or power purchase from the
grid, to meet this shortfall.
Reasonable valuations
In our view, after its recent underperformance led by aluminium prices
and higher coal prices, the risk/reward for Nalco looks balanced relative
to its own trading history. At 1.6x FY12E P/B, in line with the global
average, with 12% ROE compared to global average of 20%. At 6.9X
EV/EBITDA, it is now trading about 8% below its mid-cycle of 7.5x.
We revise down our 12-month target price to Rs87 (from Rs91.25), based
on a lower target P/B multiple of 1.7x FY12E (from 1.9x on lower
earnings/returns), implying 6% potential upside. We upgrade the stock
to Neutral from Sell.
Key risks
Downside: weaker aluminium and alumina prices; Upside: newsflow on
potential divestment of stake by Government of India
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