Motilal Oswal is bullish on Nalco has recommended buy rating on the stock with a target price of Rs 107 in its research report dated September 24, 2018.
Motilal Oswal's research report on Nalco
Revenue from sale of metal and alumina increased 26% YoY to INR93.7b driven by 21% increase in LME, partially offset by 4% appreciation of currency and 11% /3% increase in sales volumes for metal/alumina. Nalco realized a premium over the LME of USD57/t on metal exports and USD196/t in the domestic market. Alumina realization was up 26% to USD370/t. Nalco has advantage of captive bauxite mines, coal linkage and logistics due to strategic locations. However, its wage bill keeps growing unfettered every year without corresponding improvement in productivity. Employee wages now account for more than USD500/t in metal CoP (cost of production), which is the highest in the world. Although, total headcount declined 2% to 6,776, average recurring annual wages increased 32% to INR29.21m per annum – highest in Indian metal and mining industry.
Outlook
We have changed INR/USD assumption by 7%, which has been partially offset by reduction in LME assumption. As a result, estimate for EBITDA has increased by 16%/12% to INR33.1b/28.4b for FY19/FY20E. Stock is trading at attractive valuations i.e. EV/EBITDA of 3.4xFY20E and P/E of ~7xFY20E. We value the stock at INR107/share based on 5.5xEV/EBITDA for FY20E.
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