Sell Nalco: Citigroup Research

Ctitgroup Research is bearish on National Aluminium Company, Nalco and has recommended sell rating on the stock.

Ctitgroup Research report on National Aluminium Company:

Sell: Changing Forecasts on Revised Commodity Prices

Raising forecasts, target price

Our global commodity forecasts have been revised upwards. Following this we have upgraded Nalco's EPS estimates by 17% for both FY08E and FY09E. Our target price has also been increased by 17% to Rs 241 based on 8x FY08E EPS at the top end of the 6-year P/E band of 6-8x. The new target price offers limited upside, and we maintain Sell/Medium Risk.

Aluminium prices raised

Alan Heap, our global commodity analyst, has revised up aluminium prices by 7%; from USD 2,315/t to USD 2,480/t for FY08E and from USD 2,260/t to USD 2,480/t in FY09E. This upgrade is supported by a tightening market. Demand is strong in China and holding up relatively well in the US. There is also some short-term speculative support to aluminium prices.

Spot alumina prices expected to decline

Supply disruption in Guinea, which supplies 14% of the world's bauxite, was largely responsible for spot alumina prices doubling to around US$400/t levels. We have incorporated this in our forecasts. However, with recent signs of settlement of the disruptions in Guinea, we expect prices to settle at lower levels.

Reiterate Sell

Despite the increase in our target price, we retain our Sell/Medium Risk recommendation. The stock price is being supported by the current firm trends in both alumina and aluminium. However we expect prices of both these to fall from current levels, putting pressure on domestic prices and sentiment on the stock. We expect a yoy fall in margins and earnings for FY08E and FY09E.