Why you should not opt for Nalco OFS: Angle Broking guides

Nalco offer for sale (OFS) commenced on the bourses on Friday. The government is looking to offload upto 10 percent stake in the PSU firm via this route.

Angel Broking is bearish on NALCO and finds the stock expensive at current level, so it recommends investors to avoid subscribing to the company's OFS. "Nalco is trading at 5.2 times FY2014 EV/EBITDA, which is a significant premium compared to its peers. Our fair price is close to Rs 42. If the stock declines significantly maybe we would recommend investors to buy it," metal analyst Bhavesh Chauhan said in an interview to CNBC-TV18. The minimum offer price for Nalco's share sale has been set at Rs 40 a share, which was a 10 per cent discount to Thursday's close of Rs 44.65. Below is the verbatim transcript of his interview to CNBC-TV18 Q: What are you telling your clients to apply in the offer for sale (OFS) at all? A: We are not bullish on the company (NALCO). If one sees Nalco it is one of the expensive stocks. The valuation is close to 5.2 times FY14 EV/EBITDA. Last four quarters it has made losses in aluminium business. At current LME price close to USD 2,000 or 2,100 per tonne, we don’t foresee a turnaround. The only way forward ahead good things could come in is, only when its coal block starts. It has been allotted Utkal-E Coal Block. However, there is no clarity on the timeline of the block. We see volatile earnings and expensive valuation as a reason why we are advising our clients to avoid OFS. Q: It has already put in at a significant discount where the stock was hovering just a few days back. What according to you is the fair price for Nalco? A: Our fair price is close to Rs 42. So, if the stock declines significantly maybe we would recommend investors to buy. Q: Do you expect Nalco to start trading at lower valuations perhaps in line or closer to its international peers? Is there a possibility of PE contracting? A: Yes, maybe possible. In Nalco, as the float increases it might start trading at a lower valuation. Anyway it is trading at a rich valuation. So, we will take a call as and when we move ahead. Q: What do you see as the catalyst that might improve Nalco’s performance – will it be better coal availability. What exactly is the key factor holding back the companies growth? A: As far as coal availability is concerned, the coal availability from Coal India’s linkage coal which is very cheap has been quite good over the last two quarters. Despite that aluminium business continues to make losses. The only way could be, once its captive coal block starts, Utkal-E, as I said earlier. _PAGEBREAK_ However, in the near-term we do not see that starting, not in the foreseeable two years. So, in the near-term it misses the catalyst. Maybe aluminium price could increase significantly and that could be a key catalyst for the stock. Q: You just expect the stock to hover around levels of Rs 40 at best going towards level of Rs 42? A: It will remain a range bound stock at Rs 40-Rs 42 levels. Q: According to your current interaction with the management when are you expecting the production from Utkal-E coal block to happen? A: The company has not given any guidance on how it sees the production and timeline for the Utkal-E. Even we are skeptical about coal block starting. Q: What are the losses they make when aluminium price is at USD 2,000 to USD 2,100 and what is a breakeven price? A: Over the last four quarters they have average EBITD aluminium losses at close to Rs 15 crore to Rs 50 crore. Aluminium breakeven price for them would be close to USD 2200, assuming rupee-dollar rate of 53. Q: Do you expect any big institutional or foreign investors to at least in part, subscribe to the Nalco OFS or they are likely to give it a pass? A: Looks difficult. I would not expect any major institutional investors to invest at Rs 40.