Nalco’s stock has remained stable

Even as the stock has held steady against volatile international prices, valuations are seen to be on the higher side.

The state-run aluminium company Nalco is beating trends. Usually, aluminium companies like Nalco and Hindalco track metal prices on the London Metal Exchange （LME）. But, since Hindalco has acquired Novelis and 60 per cent of its revenues will now emanate from downstream value-added products like foils and cans, hence, it will be technically insulated from the vagaries of volatility in metal prices.

Nalco’s stock has remained stable, even as LME prices have corrected by around 20 per cent in the past three months. Analysts at Credit Suisse point that over the past decade, two thirds of Nalco’s Ebitda have been driven by pure aluminium prices and have had a 75 per cent correlation with LME prices. Analysts attribute this to the possibility of divestment in the company. Even though operations have been strong, the valuation numbers seem to make it look expensive. During the March 2010 quarter, the company recorded a profit of Rs 391.48 crore, as compared to a profit of Rs 83.02 crore a year ago. Operating profit margins rose past the 30-per-cent mark in the March quarter, as compared to 21 per cent in the previous quarter. However, on the valuation front, the enterprise value is around two times the invested capital of the company, whereas for Hindalco it is just about one time. Similarly, the enterprise value is around 14 times its Ebitda, while that of Hindalco is around seven times. The double valuation premium looks a bit expensive, reckon analysts.

Going ahead, Nalco has expansion plans that will enhance its operational scope. The brownfield refinery expansion, likely to happen by December, is likely to trigger growth in alumina sales. However, other expansions in the pipeline have not seen visibility. The capacity expansion in FY10 was around Rs 680 crore, as against a guidance of Rs 950 crore; the current guidance of Rs 1,390 crore is also seen as ambitious. Hence, optimism on valuations looks to be rather rich at the moment.