The government of India is divesting 10% stake in Nalco
via an OFS at Rs40/share (a 9.6% discount to its closing price as on March 14,
2013). Nalco, a Navratna company, is India third largest aluminium producer.
The company has Asia largest integrated aluminium complex. The company
engages into alumina refining (capacity – 2.1mn tonnes), aluminium smelting
(capacity – 0.7mn tonnes) and power generation (capacity – 1,200MW). The
company has a captive bauxite mine at Panchpatmalli with a mining capacity of
6.3mn tonnes p.a. The company also sells excess power. Nalco exports its products
to South East Asia, Far East, Indian subcontinent, Gulf, China and the U.S. Nalco earnings over the past 6-8 quarters have
remained very volatile. Although Nalco has captive bauxite mines, the cost of
aluminium production remains very high on account of high power costs. Further,
there is lack of clarity over the company future expansion plans. At the OFS
price, Nalco is trading at 7.4x FY2013E and 5.2x FY2014E EV/EBITDA, which is
at a significant premium compared to its peers. Hence, we recommend investors
to avoid subscribing to Nalco OFS.

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