Sell Nalco - Motilal Oswal

Nalco (NACL IN; Mkt Cap USD5.7b, CMP Rs402, Sell)

Nalco's 3QFY11 PAT increased 14% QoQ to Rs2.56b, lower than our estimate, due to increased operating costs and lower sales of aluminum and alumina.

Net sales fell 2% QoQ to Rs14.4b due to lower sales volumes despite stronger LME prices. Aluminum sales tonnage fell 5% QoQ to 103k tons.

Average 3QFY11 LME aluminum prices rose 12% QoQ to US$2,357 (up 16% YoY). Alumina traded up 11% QoQ at US$353.

EBITDA increased 12% QoQ to Rs3.9b, lower than our estimate of Rs6b, as the cost of alumina production rose. Overall operating costs also increased.

According to our calculations, the cost of production (CoP) of aluminum was US$1,981/ton (including depreciation), an increase of US$133/ton QoQ.

We have cut FY11 EPS by 11% to Rs.16.1 to factor-in less-than-expected results and rising coal costs. We have reduced our assumption of coal linkage from 90% to 80% for FY12 and FY13. Our FY12 and FY13 EPS are cut from Rs22.7 and Rs24.5 to Rs20.1 and Rs19.4 respectively. The stock trades at a rich P/E of 20x FY12E and EV/EBITDA of 10.5x FY12E. Maintain Sell.

Source : Equity Bulls

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