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Krishnan Thiagarajan

AT the current market price of Rs. 82.65, the National Aluminium Company (Nalco) is trading at a price earnings multiple of 10.2 times its annualised and sustainable per share earnings. The stock has remained fairly buoyant in the run-up to the disinvestment through the strategic sale route by the government planned latter this year. However, indications so far have been that the disinvestment may be preceded by a round of domestic / ADR offerings and that may not help capture the full value of the stock at the bourses. In this backdrop, investors may use the current buoyant price trends to pare exposures in the stock in the run-up to the disinvestment process.

SUITABILITY: With a strong presence in aluminium, Nalco is basically a commodity play. Given the strong linkage of commodity industries to international price trends and import tariffs, the Nalco stock is likely to be weighed down by the relatively sluggish price trends and lower import tariffs announced in the recent Budget.

Investors who have a significantly high exposure to commodity plays in their portfolios may consider booking profits and broadbasing their exposures across other commodity stocks.

PROSPECTS: Using the Balco disinvestment at Rs. 1100 crore as a benchmark, we find that at the current market capitalisation at over Rs. 5300 crore, the Nalco's valuation has run significantly ahead of Balco. Nalco's production capacities of aluminium ingots in 2.4 times higher than Balco, while its market capitalisation is 5 times higher than Balco. Even if we account for the greater efficiencies in operation, proposed addition to production capacities and superior production technology, the premium element that may be embedded in Nalco's price on disinvestment remains open to debate. At this point in time, the stock is also trading above its book value.

On the operational front, the post tax earnings of Nalco have taken a sharp knock in the first nine months of 2002 to Rs. 270.37 crore from Rs. 494.85 crore in the corresponding period of the previous year. This sharp decline is attributable to additional wage liability on account of wage revision to the tune of Rs. 155.50 crore (including a one time and non-recurring element). Even if we ignore this element, the post tax earnings has declined over this period. Despite an increase in the production of calcined alumina and aluminium metal in the first nine months of 2002, the post tax earnings decline is attributable to the decline in realisations on account of relatively soft international prices of aluminium and an increase in raw material costs. To some extent, the reduction in the import tariffs from 25 per cent to 15 per cent in the recent Budget may also be a cause for concern as it may reduce the leeway available to Nalco to enhance its realisations, going forward.

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