NALCO has corrected 30% from its peak hit in September ’14 on account of a slide in aluminium prices, cancellation of coal block and subdued demand for metals. We believe the correction in the stock is overdone as we expect the impact of lower realisations on earnings would be offset by a sharp correction in raw material prices and higher external alumina sales. I expect operating margin to improve from 13.8% in FY14 to 20.6% in FY15 and 23% in FY16. NALCO currently has ~Rs61.5bn of cash and cash equivalent, implying Rs23.9/share or 49% of the CMP. I expect earnings CAGR of 29.9% over FY14-17E led by a combination of higher volumes and lower costs. At the CMP, the company is trading at 3.1x FY16 EV/EBIDTA, which is at huge discount to its historic average and is also lower than its international peers.
We recommend a strong Buy at current levels @ 50 for an easy Target of 60 in the short term
