Like many of its public sector peers, Nalco is a debt free company with a dominant position and strong cost advantage in the domestic industry and has drawn up big, long term growth plans. However, Nalco’s planned follow on public offering this year may not elicit huge response given the muted volume growth and metal pricing outlook. Among the few positives is that alumina volumes are estimated to increase while lower costs should help prop up margins both of which are factored in the current share price.

The government’s holding in Nalco currently stands at 87.15% and 10% dilution at current market price of INR 62 could fetch about INR 1,600 crore.

Analysts also believe that valuations are slightly higher at over 13 times earnings and six times enterprise value to operating profits based on 2012 to 2013 estimates. From a longer term perspective though, stock valuations appear a bit reasonable considering the cash in the books. Currently, Nalco has cash and investments worth INR 4,900 crore.

And by end of 2012 to 2013, this would rise to about INR 6,000 crore which is about two fifths of its current market capitalization. However, the flip side is that lots of cash also suppresses return ratios, which the Street is usually wary about. In fact, return ratios for Nalco have been unexciting in the last 2 to 3 years. This large cash has helped earn interest income, which has formed a large part of Nalco’s profit in recent times and suppressed overall returns.

Source - Business Standard

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