The stock of National Aluminium Company (Nalco) recovered smartly from its 52-week lows in August gaining about 44 per cent to the current price of Rs 40.45. While the sharp correction in August was on account of a slide in aluminium prices, cancellation of coal blocks and subdued demand for metals, the correction however was overdone. The company's cash and cash equivalent itself comes to about Rs 21.6 a share and given intrinsic strengths, one would have expected a bounce back. The company has since got its coal blocks back and reported a strong performance in the September 2015 quarter.
Though the sector outlook may not have changed much, looking at some strength in aluminium premiums now, as well as higher external alumina sales by the company one may expect some more upside in the company's stock price. Analysts have pegged target prices at Rs 45 (India Infoline) and Rs 48 (Antique Stock Broking) which indicates a 10 per cent upside for stock priced at Rs 40.45. Also, looking at the balance sheet strength compared to high debt on books of Vedanta and Hindalco, the larger aluminium sector peers, Nalco fares better.
The average base metal prices at the London Metal Exchange fell sharply in the range of 4-8 per cent month-on-month during November, however aluminium prices at around $1,487 per tonne remain flat. The regional premium on zinc and aluminium remains firm, suggests Elara Capital's data which is positive for the manufacturers. Added to this is lower coal price that is benefitting Nalco. Operating profit of Rs 339 crore during September 2015 quarter was much higher than analyst estimates due to a jump in contribution from alumina division and lower coal prices. Company saw external alumina sales volume increase by 43.2 per cent even after witnessing an increase in internal consumption on the back of increase in aluminium production.
Lower coal prices are helping and larger e-auction volumes at lower prices by Coal India will aid Nalco in the interim. The company's getting back coal blocks is positive for the longer term as it ensures captive coal supplies after the block is developed and starts producing.
Analysts at Antique Stock Broking remain positive on Nalco, given its long alumina position and the firm pricing outlook, though there is softness in LME aluminium prices and physical premiums. Alumina prices as a percentage of LME spot aluminium prices have remained relatively stable. Analysts at IIFL say that the company which is trading at an estimated 2.8 times FY17 enterprise value to earnings before interest depreciation taxes and amortization is at a huge discount to its historic average and is also lower than its international peers. Downside from current levels would be protected by the high cash balance with the company, they add.
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