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Nalco – In for a windfall - Views on News from Equitymaster
 
 
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  • Aug 18, 2000

    Nalco – In for a windfall

    Nalco, the public sector unit has a strong presence in the alumina and aluminium market. Owing to its efficient operations, cheap captive power plant and huge bauxite reserves, it is one of the lowest cost producers of alumina in the world.

    Aluminium prices in the past few months have witnessed a decline from $1,680 in January 2000 to $1,527 in August 2000. However the prices have started moving up from July 2000. Riding on the boom of rising international prices of aluminium, Nalco is likely to receive boost as difference between landed cost and domestic market prices have widened. This leaves enough room for company to further hike the prices and thereby improve its bottomline considerably in FY01, without any threat of cheap imports. Also depreciation in the value of rupee will bring windfall gains to the company as it exports around 50% of its earnings.

    Trend of aluminium prices
    Year Avg. LME Prices
    ($/MT)
    FY96 1,703
    FY97 1,503
    FY98 1,566
    FY99 1,291
    Jan-00 1,681
    Feb-00 1,671
    Mar-00 1,577
    Apr-00 1,458
    May-00 1,467
    Jun-00 1,507
    Jul-00 1,564
    Aug-00 * 1,527
    * Average upto 17th August 2000

    The global outlook for aluminium industry is bright. International majors like Kaiser Aluminium Corporation has announced a cut down in production by 128,000 tonnes, due to hike in power tariff. Alcoa has also announced the cut down of production by 121,000 tonnes. This has led to fall in the inventory level at LME by 349, 825 tonnes in August 2000 compared to 772,450 tonnes in August 1999. Lower inventory level and increasing demand has created golden opportunity for Nalco to increase its exports in the current year. Also consolidation in the aluminium industry both globally and domestically will enable major players to control prices, product rationalisation and better logistics.

    At the current market price of Rs 42, Nalco is trading at a P/E ratio of 5 times its FY00 earnings compared to a P/E ratio of 9.8 times of Hindalco. The lower valuation of the company is mainly due to its public sector tag. Historically the company’s P/E was in the range of 10-14 times. At the current price Nalco is the best stock available in the aluminium industry at the lower valuations.

     

     

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