Citigroup recommends 'Sell' rating on National Aluminium

National Aluminium

Research: Citigroup

Rating: Sell

CMP: Rs 425

Citigroup recommends 'Sell' rating on National Aluminium and cuts the target price from Rs 355 to Rs 297 on lower LME price forecasts. They continue to value Nalco’s core business at 13x June 11 PE, to which they add cash per share of Rs 73 and arrive at a target price of Rs 297. At the target price, Nalco would trade at a PE of 14.2x and EV/EBITDA of 6.1x. The stock has run up 9% in the past six months probably due to the positive sentiment regarding possible disinvestments by the government.

Citigroup expects limited downside price risk as it already seems to be discounting a significant economic slowdown. Key positives: 1) a modest deficit in 2011 and 2012; 2) at current prices ($1,900/t), about 30% of production is sub-economic; 3) production cuts in China due to falling margins and government measures; 4) Inventory levels are high but there is good potential for physically backed aluminium ETF. A 5% change in aluminium prices would impact FY11 and FY12 PAT by 15%. A 5% change in the Rs/$ rate would impact PAT by 16%.