Government of India has proposed an offer for sale (OFS) of equity shares of NALCO. The offer for sale will be for 257.7mn equity shares, constituting 10% of the paid up equity share capital. The government intends to offer 5% initially with an option to sell another 5% (Greenshoe) if the demand stands out strong. The floor price has been kept at Rs40/share and will raise Rs10.3bn on the complete issue getting subscribed. The floor price of Rs40 is at 10% discount to its previous day closing.
NALCO’s performance over the last two quarter has been impacted by lower availability of bauxite from its captive mines. Due to the closure of its Panchpatmali mines for a month and heavy rainfall in the region supply of bauxite declined. The company has managed to get a temporary working permit in mid-December for one year. With an increase in bauxite supply we estimate a ramp up in alumina production from Q4 FY13. We expect alumina production to jump from 1.7mn tons in FY13 to 1.9mn tons in FY14 leading to a 23% yoy increase in external alumina sales.
We believe that the worst is behind us and the company has formed a bottom in profitability in Q2 FY13. An increase in alumina sales coupled with lower raw material costs and marginal improvement in metal prices would improve margins for the company. We expect OPM to improve drastically from Q2 FY13 levels to 12.2% in FY14 and 12.6% in FY15. We estimate operating profit to increase by 43.3% yoy to Rs9.3bn in FY14. With no major capex over the next two years, we estimate cash levels to increase from Rs49bn at the end of H2 FY13 to Rs60bn by FY15. Our FY14 cash levels account for 56% of the current OFS base price and would lend support to the stock price in the near term.
At the OFS base price of Rs40, the company is trading at 4.9x FY14 EV/EBIDTA and 4.1x FY15 EV/EBIDTA, which is at huge discount to its historic average and is also lower than its international peers. We do not see much downside from the floor price of Rs40 and advice investors to subscribe to the offer for sale scheduled for today with a target price of Rs44.6.
|Y/e 31 Mar (Rs m)||FY12||FY13E||FY14E||FY15E|
|yoy growth (%)||9.2||1.8||12.8||9.3|
|yoy growth (%)||(20.6)||(47.4)||47.9||16.0|
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