Sell NALCO; target of Rs 42: PINC Research

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Sell NALCO; target of Rs 42: PINC Research

PINC Research is bearish on National Aluminium Company (NALCO) and has recommended sell rating on the stock with a target of Rs 42 in its February 6, 2012 research report.

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PINC Research is bearish on National Aluminium Company (NALCO) and has recommended sell rating on the stock with a target of Rs 42 in its February 6, 2012 research report.

"NALCO, despite 10% YoY decline in LME aluminium prices to USD2,095/t and 5% YoY fall in aluminium sales volumes, NALCO's Q3FY12 revenue remained flat at Rs14.5bn on 13% YoY rupee depreciation. However, EBITDA declined 84% YoY to Rs639mn on higher coal, power & fuel and staff cost. OPM contracted 2,258bps YoY to an all-time low of 4.4%. PAT at Rs512mn plunged 80% YoY on lower EBITDA and higher depreciation despite higher treasury income."

"Although the company commissioned 525kt alumina refinery during Q1, alumina output is yet to expand and was flat QoQ at 389kt and alumina sales volume at 163kt declined 1% YoY as the company built inventory. Aluminium output at 94kt declined 16% YoY on shortage of coal and power, resulting in a shutdown of 120pots since Sep'11. Aluminium sales volume at 98kt, declined 5% YoY. Cost pressure continued with alumina cost of production (CoP) rising 25% YoY to USD253/t, captive power generation cost up 36% YoY to Rs3.10/unit and aluminium CoP rising 22% YoY to USD2,285/t . The hike in the cost was mainly due to higher raw material, energy and staff cost. Aluminium smelting cost at USD1,787/t, though declined 14% QoQ, rose 21% YoY."

"In Q3, Nalco's OPM at 4.4% reached an all-time low as the cost inflated on account of procurement of high cost coal and 30% YoY increase in staff cost. Aluminium CoP rose to USD2,285/t in Q3 vs USD1,572 and USD1,829 in FY10 and FY11 respectively. Lower LME price and higher employee cost on impact of 7th wage revision 2012 onwards would put further pressure on Nalco's margin. Despite 48% decline in Nalco's stock price in 2011, we find the company overvalued at 9.5x FY13E EV/EBITDA, given margin pressure and imprudent investments. We maintain 'SELL' on the stock with a target price of Rs42 (5.0x FY13E EV/EBITDA)," says PINC Research report. 

Public holding more than 90% in Indian cos

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To read the full report click on the attachment