NALCO - Valuations ahead of fundamentals - PINC Result Review

In Q2FY11, Nalco's revenues increased by 25% YoY to Rs14.8bn mainly on higher LME prices (up 16% YoY to USD2,086/tonne). Consequently, EBITDA surged by 145% YoY to Rs3.5bn and OPM expanded to 23.1% vs. 12.0% in Q2FY10. PAT grew at a subdued 40.5% YoY to Rs2.2bn due to lower treasury income and higher tax. Nalco has cash and equivalent of Rs47.7bn.

Input cost, sans coal, declines: Although aluminium cost of production rose sequentially on higher power cost (0.2mnt imported coal at Rs4,600/t), annual contract cost of other inputs (caustic soda, lime, CP coke, CT pitch) declined.

Project Status : Alumina expansion of 525ktpa at Damanjodi is expected by Jan'11. Forest and environment clearances received for Utkal coal block; land acquisition is in progress.

VALUATIONS AND RECOMMENDATION

We expect Nalco's OPM to expand in H2FY11 (we expect 31.3% OPM vs. 26.6% in H1) on lower raw material and coal cost. Volume and margin expansion in FY12 would be primarily driven by alumina capacity expansion. We revise our earning estimates upwards to factor in the lower input cost. However, at CMP of Rs404, we find the stock expensive at 8.0x FY12E EV/EBITDA. Maintain 'SELL' with a revised target price of Rs329 (6x FY12E EV/EBITDA).

Source : Equity Bulls

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