Recommendation From Aluminium Sector
Sanket Dewarkar / 23 Jun 2016
This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.
This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.
HERE IS WHY
Virtually debt free
Likely to be re-rated on buyback
Aluminium consumption may double in the next four years
This time we recommend National Aluminium Company for Low Scrip column as the company management has taken significant cost cutting measures and is focusing on higher production and expansion. This eventually will lead to margins improvement in aluminium business. The company management is confident that its performance will improve in the next quarter. We expect that the company’s alumina segment will command higher margins weaving the benefit of low cost of production. Additionally, the company is virtually debt free which further augments our confidence.
The company has approved a proposal to buy back 64.43 crore shares worth close to Rs 2,835 crore, a move that will lead to liquidation of government's stake in the firm. The buyback will happen at Rs 44 per equity vs Rs 40 as the current share price. Government of India holding would decline from 80.9 per cent to 74.6 per cent if minority shareholders do not offer shares. We believe buyback is a good utilisation of surplus cash on the balance sheet and it would be EPS and RoE accretive.
Nalco faces a daunting challenge of keeping operational and raw material costs in check to stay competitive even as it tries to expand capacity to take advantage of an infrastructure boom in India. Demand from power sector is on the rise as the government sharpens its investment focus on power transmission. Also, an expected demand from transport, building and construction sectors would further increase consumption for the metal. Construction of smart cities and rising consumption for products such as beverage cans, alloy wheels, automobile bodies and railway coaches could also act as a catalyst. Nalco expects India to double its aluminium consumption to five million tonnes in the next four years. We believe the management is more focused and aims to tap this opportunity.
In FY16, Nalco’s production volume for alumina and aluminium increased by 5.5 per cent and 14 per cent respectively to 1.95 mt and 372 kt respectively. Bauxite production was higher by 10 per cent YoY to 6.34 mt. It was operating its smelters at 65-70 per cent capacity utilization earlier, limited to the availability of linkage coal. On capex front, company has announced investment of Rs 20,550 crore for expansion of its alumina refinery at Damanjodi and setting up an aluminium park at Angul in the state. Recently, Nalco and Iranian Mines & Mining Industries Development Renovation Organization (IMIDRO) have signed a memorandum of understanding (MoU) to jointly explore the possibility of setting up an Aluminium smelter in Iran. The company also approved acquisition of 26 per cent stake in Kakrapar Atomic Power Project for around Rs 900 crore through its joint venture (JV) with Nuclear Power Corporation of India (NPCIL).
On valuation front, the company's stocks are available at 14.65x price to earnings ratio and based on price to book value it’s trading at 0.80x. We believe the stock is likely to be re-rated on buyback, which will improve its visibility on capital allocation. Therefore we recommend BUYing this stock with expectation of around 30 per cent upside from the current market price in next one year.
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