Nalco, NMDC unlikely to rise further

Nalco and NMDC have gained 6% and 2% in market value, respectively, after the government announced plans to divest 12% stake in the former and 10% stake in the latter. But the euphoria may well be short-lived as both these stocks are already trading at significant premiums to their private sector peers. And given the concerns in the sectors that they operate in — aluminum and iron ore — there is little room for further appreciation.

As part of the finance ministry’s plans to raise Rs 30,000 crore in the current financial year through disinvestment, the government has invited merchant bankers and brokers to sell part of its stakes in Nalco and NMDC.

Though the pricing of the issues are not known, at current market valuations, a 12% stake sale in Nalco would earn the government Rs 1,625 crore, while a 10% sale in NMDC would fetch Rs 7,440 crore – adding more cash to the already cash-rich companies.

NMDC, which produced double the amount of iron ore Sesa Goa produced in FY12, trades at a price to earnings (P/E) ratio of 10.07 times while its private sector competitor trades at 5.15 times. The company is debt-free and currently has cash reserves of Rs 20,264.58 crore, compared with Rs 77.7 crore Sesa Goa has on its books.

NMDC had increased iron ore prices recently, but with the 40% fall in global iron ore prices in the past six months amid concerns of a slowdown in demand, NMDC might have to cut back this price hike in the coming months. Just like NMDC, Nalco is also debt-free.

It has a cash pile of Rs 4,168.35 crore, which is half as much as Sterlite’s and 1.2 times that of Hindalco. Like most aluminum producers, growth in Nalco’s sales and profit has been impacted by weak demand and a sharp fall in aluminum prices.

The company’s profit grew 23% for the year ended March 2012, compared with a 38% rise in Hindalco’s profit. Sterlite reported a 4% decline in profit for the year. At 18.9 times P/E, Nalco commands valuations twice as much as Hindalco’s and Sterlite’s.