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Nalco offer for sale: Our view - Views on News from Equitymaster
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Nalco offer for sale: Our view
Mar 14, 2013

The government of India (GOI) has set a disinvestment target of Rs 240 bn for the fiscal ended March 2013. So far it has already fetched Rs 215 bn. In order to accomplish the target, the government has lined up few more disinvestment prospects in the next few weeks. One of them is Nalco. The government is finally going through with the disinvestment of Nalco. In November 2012, the government had deferred disinvestment of Nalco citing poor second-quarter performance which had raised valuation concerns.

Nalco is one of the lowest cost producers of Alumina in the world due to its high grade captive bauxite mines. Nalco is the second largest primary aluminium producer in India after Hindalco. Its facilities are amongst the most modern and technologically advanced despite the company having started manufacturing barely 30 years ago. Its track record of consistently generating profits rests on its core strength of producing alumina from own resource rich bauxite mine. Nalco is the domestic market leader in aluminium and has retained this position. The company has built this strong market position through its quality products and superior customer service. Nalco's products command a premium to the prevailing London Metal Exchange (LME) prices due to the high purity of its primary metal.

Issue details

The government would offload more than 128.9 m shares, amounting to about 5% stake in the company. There would also be an option to sell additional 128.9 m equity shares of the face value of Rs 5 each of the company, collectively aggregating to approximately 10% of the total paid up equity share capital of the company

The offer for sale would take place through a separate window of stock exchange (Bidding) on 15th March, 2013 from 9.15 am to 3.30 pm. Nalco has fixed the issue price at Rs 40 per share. The price set is at a discount of 10.6% at the closing price on 14th March, 2013. If fully subscribed, the government would get Rs 11 bn through this stake sale.

The stock is trading at a multiple of 18.1 times its trailing twelve month earnings and at a P/BV of 1.2. The company's performance in the past was hindered by the disruptions in coal supply. It is also affected by lower aluminium prices and slowdown in global demand especially from China. However we believe that the worst is behind it and Nalco's profits have bottomed out. We expect margins to improve on the back of improved coal supply and higher sales of alumina in the export market. We have earlier reiterated our Buy recommendation on the stock. Considering the attractive valuations for the offer for sale, we would recommend investors to 'Apply' to the issue from a long term perspective. However, please keep in mind that no stock should form more than 5% of your overall portfolio.

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