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We upgrade Nalco to Outperform from Underperform
and raise price target to Rs73 from Rs67.
The stock is trading at five-year low valuations with
EV/EBITDA and PE at 2008 levels.
Catalyst: commissioning of the new alumina refinery,
which will enable Nalco to sell ~1.2m tonnes of smelter
grade alumina, giving it higher EBITDA than for
aluminium.
We raise FY13E EPS estimate by 6.7% to Rs6.5. We
are also introducing FY14 estimates
Play on alumina. After the commissioning of the new
refinery in Damanjodi, Nalco would have around 1.2m
tonnes of surplus alumina. Our analysis of the global
alumina market indicates that there is likely to be
shortage/tightness in supply in the next 3-4 years provided
aluminium demand keeps growing at around 4-5%.
Aluminium price has strong cost-push support – We
expect rising energy costs and alumina prices to support
aluminium prices. Our global resources team is bullish on
coal – we estimate thermal coal could rise to US$150/tonne
going forward. In a scenario of rising coal and oil prices,
there will be cost-push support for aluminium. We assume a
spot price of US$2,500/ tonne in our forecasts.
Nalco’s production costs to increase – Non-availability of
linkage coal/delay in coal block development and rising
carbon and caustic soda prices could dilute the profitability
of the company, in our view.
Cash needs to be valued at a premium to book value –
Rs20bn of Nalco’s cash needs to be valued at a premium to
book value. Nalco is using this cash to acquire 49% of the
Kapakhera nuclear power project. The equity IRR of the
project is likely to be ~15-16%, which is above investment
grade. However, we have valued cash at book value.
Valuation: Price target of Rs73 – We rate the stock
Outperform with a price target of Rs73. At our price target
Nalco would trade at 11x FY13E earnings. Upside to our
valuation could arise if the cash is valued at higher than
book value given attractive investment opportunities.
Risks. A 1% fall in aluminium prices will result in profitability
declining 2.5%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We upgrade Nalco to Outperform from Underperform
and raise price target to Rs73 from Rs67.
The stock is trading at five-year low valuations with
EV/EBITDA and PE at 2008 levels.
Catalyst: commissioning of the new alumina refinery,
which will enable Nalco to sell ~1.2m tonnes of smelter
grade alumina, giving it higher EBITDA than for
aluminium.
We raise FY13E EPS estimate by 6.7% to Rs6.5. We
are also introducing FY14 estimates
Play on alumina. After the commissioning of the new
refinery in Damanjodi, Nalco would have around 1.2m
tonnes of surplus alumina. Our analysis of the global
alumina market indicates that there is likely to be
shortage/tightness in supply in the next 3-4 years provided
aluminium demand keeps growing at around 4-5%.
Aluminium price has strong cost-push support – We
expect rising energy costs and alumina prices to support
aluminium prices. Our global resources team is bullish on
coal – we estimate thermal coal could rise to US$150/tonne
going forward. In a scenario of rising coal and oil prices,
there will be cost-push support for aluminium. We assume a
spot price of US$2,500/ tonne in our forecasts.
Nalco’s production costs to increase – Non-availability of
linkage coal/delay in coal block development and rising
carbon and caustic soda prices could dilute the profitability
of the company, in our view.
Cash needs to be valued at a premium to book value –
Rs20bn of Nalco’s cash needs to be valued at a premium to
book value. Nalco is using this cash to acquire 49% of the
Kapakhera nuclear power project. The equity IRR of the
project is likely to be ~15-16%, which is above investment
grade. However, we have valued cash at book value.
Valuation: Price target of Rs73 – We rate the stock
Outperform with a price target of Rs73. At our price target
Nalco would trade at 11x FY13E earnings. Upside to our
valuation could arise if the cash is valued at higher than
book value given attractive investment opportunities.
Risks. A 1% fall in aluminium prices will result in profitability
declining 2.5%.
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