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FPO Note | Non-Ferrous

March 14, 2013

NALCO
Expensive valuation
Company background: The government of India is divesting 10% stake in Nalco via an OFS at `40/share (a 9.6% discount to its closing price as on March 14, 2013). Nalco, a Navratna company, is Indias third largest aluminium producer. The company has Asia's 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.

AVOID
Issue Open: March 15, 2013 Issue Close: March 15, 2013
Issue Details
Face Value: `5 Present Eq. Paid-up Capital: `258cr Offer Size: 25.8cr Shares Post Eq. Paid-up Capital: `258cr Issue size (amount):* `1,031cr OFS Floor Price: `40 Post-issue implied mkt cap: `10,308cr Promoters holding Pre-Issue: 87.2% Promoters holding Post-Issue: 77.2%

Aluminium business continues to make losses: At current aluminium price of US$2,000-2,100/tonne, we expect Nalco to make losses on its Aluminium business. Moreover, prices of key inputs such as coal, caustic soda, CP coke, aluminium fluoride etc continue to remain high. Hence, we expect Nalco to operate its aluminium smelters at lower utilization levels during FY2013-14. Coal supply issues to continue: Nalco has been facing coal supply issues,
which disrupted its operations in the past few quarters. The company sources its annual coal requirement from Mahanadi Coalfields Ltd., but the supply is not evenly distributed. In our view, any disturbance in coal supply would increase the companys dependence on imported or external coal (which is very expensive compared to linkage coal), thereby negatively affecting its margins.

Post Issue Shareholding Pattern


Promoters Group MF/Banks/Indian FIs/FIIs/Public & Others 77.2

No clarity on timelines for production from Utkal coal block: Nalco has
been allotted Utkal-E coal block which has estimated reserves of 70mn tonnes. Currently, there is no clarity on land acquisition for coal block. Although Nalco expects to commence production from this mine by end of CY2013, our recent experience suggests that it could take a much longer time to acquire land and sign the mining lease with the state government.

22.8

Outlook and valuation: Nalcos 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 companys 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.
Key financials (Standalone)
Y/E March (` cr) Net sales % chg Net profit % chg FDEPS (`) OPM (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY11 5,959 17.9 1,069 31.3 4.1 26.7 9.6 0.9 9.9 10.2 0.9 3.3

FY12 6,500 9.1 871 (18.5) 3.4 17.5 11.8 0.9 7.4 5.5 0.8 4.7

FY13E 6,630 2.0 548 (37.1) 2.1 11.4 18.8 0.9 4.6 2.0 0.8 7.4

FY14E 8,357 26.0 840 53.3 3.3 14.5 12.3 0.8 6.9 5.0 0.8 5.2

Bhavesh Chauhan
Tel: 022- 39357600 Ext: 6821 bhaveshu.chauhan@angelbroking.com

Vinay Rachh
Tel: 022- 39357600 Ext: 6841 vinay.rachh@angelbroking.com

Please refer to important disclosures at the end of this report

NALCO | FPO Note

Company Background
Nalco, a Navratna company, is Indias third largest aluminium producer. The company has Asia's 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.

Issue Details
The Promoter (Government of India), proposes to sell 12,88,61,925 equity shares of the face value of `5 each with an option to sell an additional 12,88,61,925 equity shares of the face value of `5 each collectively aggregating to approximately 10% of the total paid up equity share capital of the company. Nalco has fixed the OFS floor price at `40 per share (at a 9.6% discount to its closing price as on March 14, 2013).

Exhibit 1: Shareholding Pattern


Particulars Promoter and promoter group Total public holding Total
Source: Company, Angel Research

Pre-Issue No. of shares 2,24,60,63,363 33,11,75,149 2,57,72,38,512 (%) 87.2 12.8 100

Post-Issue No. of shares 1,98,83,39,512 58,88,99,000 2,57,72,38,512 (%) 77.2 22.8 100

March 14, 2013

NALCO | FPO Note

Investment rationale
Aluminium business continues to make losses
At current aluminium price of US$2,000-2,100/tonne, we expect Nalco to make losses on its Aluminium business. Moreover, prices of key inputs such as coal, caustic soda, CP coke, aluminium fluoride etc continue to remain high. Hence, we expect Nalco to operate its aluminium smelters at lower utilization levels during FY2013-14.

Exhibit 2: Aluminium business continues to make losses


300 250 200 150 100 50 0 (50) (100) (150) (200) (89) (153) 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 Aluminium EBIT
Source: Company, Angel Research

242 193

(` cr)

(16)

(19)

(53)

(22)

Coal supply issues to continue


Nalco has been facing coal supply issues, which disrupted its operations in the past few quarters. The company sources its annual coal requirement from Mahanadi Coalfields Ltd., but the supply is not evenly distributed. In our view, any disturbance in coal supply would increase the companys dependence on imported or external coal (which is very expensive compared to linkage coal), thereby negatively affecting its margins.

No clarity on timelines for production from Utkal coal block


Nalco has been allotted Utkal-E coal block which has estimated reserves of 70mn tonnes. Currently, there is no clarity on land acquisition for coal block. Although Nalco expects to commence production from this mine by end of CY2013, our recent experience suggests that it could take a much longer time to acquire land and sign the mining lease with the state government.

Limited growth visibility


There is little clarity on Nalcos proposed expansion plans, as they are in various stages of financial closure and significant progress is yet to be made.

March 14, 2013

NALCO | FPO Note

Outlook and valuation


Nalcos 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 companys 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.

March 14, 2013

NALCO | FPO Note

Profit & loss statement (Standalone)


Y/E March (` cr) Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income Recurring PBT % chg Extraordinary Inc/(Expense) PBT (reported) Tax (% of PBT) PAT (reported) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY09 5,095 5,095 2.1 3,401 585 1,562 771 483 1,694 (23.7) 33.2 272 1,421 (26.7) 27.9 4 496 1,913 (23.2) 14 1,927 655 34.0 1,272 1,272 1,258 (24.0) 24.7 4.9 4.9 (24.0) FY10 5,055 119 5,174 1.6 4,071 808 2,124 813 326 1,102 (34.9) 21.8 319 783 (44.9) 15.5 2 374 1,155 (39.6) 1,155 341 29.5 814 814 814 (35.3) 16.1 3.2 3.2 (35.3) FY11 5,959 98 6,057 17.1 4,464 704 1,765 961 1,033 1,592 44.4 26.7 422 1,170 49.5 19.6 0 353 1,524 31.9 1,524 455 29.8 1,069 1,069 1,069 31.3 17.9 4.1 4.1 31.3 FY12 6,500 111 6,612 9.2 5,473 1,034 2,197 1,035 1,208 1,139 (28.5) 17.5 467 673 (42.5) 10.3 1 542 1,214 (20.3) (22) 1,192 342 28.7 850 850 871 (18.5) 13.4 3.4 3.4 (18.5) FY13E 6,630 136 6,766 2.3 6,013 1,094 3,070 1,153 696 753 (33.9) 11.4 500 253 (62.4) 3.8 6 548 794 (34.6) 794 246 31.0 548 548 548 (37.1) 8.3 2.1 2.1 (37.1) FY14E 8,357 149 8,506 25.7 7,298 1,254 3,802 1,239 1,003 1,208 60.4 14.5 557 651 157.4 7.8 2 586 1,235 55.5 1,235 395 32.0 840 840 840 53.3 10.1 3.3 3.3 53.3

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NALCO | FPO Note

Balance sheet (Standalone)


Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders Funds Total Loans Other long-term liabilities Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Othe long-term assets Mis. Exp. not written off Total Assets 644 9,126 9,770 621 10,391 9,900 5,868 4,032 2,868 896 4,529 2,869 616 1,044 1,933 2,596 10,391 644 9,751 10,396 661 11,056 11,018 6,182 4,836 2,243 987 5,210 3,152 786 1,272 2,220 2,990 11,056 1,289 9,876 11,165 270 693 12,128 12,076 6,583 5,494 1,707 1,332 5,589 3,795 612 1,183 2,821 2,768 827 12,128 1,289 10,426 11,715 280 849 12,844 13,659 7,046 6,612 684 754 6,269 4,168 750 1,351 2,677 3,592 1,201 12,844 1,289 10,613 11,902 280 849 13,030 14,709 7,546 7,162 584 754 6,006 3,952 750 1,303 2,677 3,329 1,201 13,030 1,289 11,061 12,350 280 849 13,479 16,409 8,103 8,306 284 754 5,611 3,218 750 1,643 2,677 2,934 1,201 13,479 FY09 FY10 FY11 FY12 FY13E FY14E

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NALCO | FPO Note

Cash flow statement (Standalone)


Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Others Direct taxes paid Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments (Inc.)/ Dec. in loans and adv. Others Cash Flow from Investing Inc./(Dec.) in loans Dividend Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY09 1,927 273 361 60 682 1,938 (2,211) 13 (2,198) 388 (388) (647) 3,516 2,869 FY10 1,155 319 (20) 9 292 1,172 (678) 84 (593) 303.8 (304) 275 2,878 3,152 FY11 1,524 422 288 (56) 548 1,630 (833) 65 (768) 219 (219) 642 3,152 3,794 FY12 1,197 467 (397) (77) 304 886 (181) (181) 416 15 (430) 275 3,794 4,168 FY13E 794 500 47 246 1,095 (950) (950) 361 (361) (216) 4,168 3,952 FY14E 1,235 557 (339) 395 1,057 (1,400) (1,400) 392 (392) (734) 3,952 3,218

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NALCO | FPO Note

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio (%) Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA (0.4) (2.2) (0.4) (3.8) (0.5) (3.2) (0.4) (4.3) (0.4) (6.2) (0.3) (3.3) 0.5 55 2 717 (5) 0.5 65 13 718 (27) 0.5 62 7 0 22 0.5 64 8 0 71 0.5 64 8 0 73 0.5 64 8 0 64 14.3 39.1 13.6 7.3 18.6 8.1 10.2 24.1 9.9 5.5 11.2 7.4 2.0 3.5 4.6 5.0 7.9 6.9 27.9 66.0 1.4 25.8 25.8 15.5 70.5 1.2 13.4 13.4 19.6 70.2 1.2 17.2 17.2 10.3 71.3 1.1 8.1 8.1 3.8 69.0 0.9 2.5 2.5 7.8 68.0 1.0 5.5 5.5 4.9 4.9 6.0 1.3 37.9 3.2 3.2 4.4 0.6 40.3 4.1 4.1 5.8 0.9 43.3 3.4 3.4 5.1 1.0 45.5 2.1 2.1 4.1 1.2 46.2 3.3 3.3 5.4 1.3 47.9 8.2 6.7 1.1 3.1 1.3 3.9 0.6 12.7 9.1 1.0 1.6 1.2 5.6 0.6 9.6 6.9 0.9 2.2 0.9 3.3 0.4 11.8 7.8 0.9 2.5 0.8 4.7 0.4 18.8 9.8 0.9 3.0 0.8 7.4 0.4 12.3 7.4 0.8 3.3 0.8 5.2 0.5 FY09 FY10 FY11 FY12 FY13E FY14E

March 14, 2013

NALCO | FPO Note

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Nalco No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

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NALCO | FPO Note


6th Floor, Ackruti Star, Central Road, MIDC, Andheri (E), Mumbai- 400 093. Tel: (022) 39357800
Research Team Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Bhavesh Chauhan Viral Shah Sharan Lillaney V Srinivasan Yaresh Kothari Ankita Somani Sourabh Taparia Bhupali Gursale Vinay Rachh Amit Patil Shareen Batatawala Twinkle Gosar Tejashwini Kumari Technicals: Shardul Kulkarni Sameet Chavan Sacchitanand Uttekar Derivatives: Siddarth Bhamre Institutional Sales Team: Mayuresh Joshi Hiten Sampat Meenakshi Chavan Gaurang Tisani Akshay Shah Production Team: Tejas Vahalia Dilip Patel Research Editor Production Incharge tejas.vahalia@angelbroking.com dilipm.patel@angelbroking.com VP - Institutional Sales Sr. A.V.P- Institution sales Dealer Dealer Sr. Executive mayuresh.joshi@angelbroking.com hiten.sampat@angelbroking.com meenakshis.chavan@angelbroking.com gaurangp.tisani@angelbroking.com akshayr.shah@angelbroking.com Head - Derivatives siddarth.bhamre@angelbroking.com Sr. Technical Analyst Technical Analyst Technical Analyst shardul.kulkarni@angelbroking.com sameet.chavan@angelbroking.com sacchitanand.uttekar@angelbroking.com VP-Research, Pharmaceutical VP-Research, Banking Sr. Analyst (Metals & Mining) Sr. Analyst (Infrastructure) Analyst (Mid-cap) Analyst (Cement, Power, FMCG) Analyst (Automobile) Analyst (IT, Telecom) Analyst (Banking) Economist Research Associate Research Associate Research Associate Research Associate Research Associate sarabjit@angelbroking.com vaibhav.agrawal@angelbroking.com bhaveshu.chauhan@angelbroking.com viralk.shah@angelbroking.com sharanb.lillaney@angelbroking.com v.srinivasan@angelbroking.com yareshb.kothari@angelbroking.com ankita.somani@angelbroking.com sourabh.taparia@angelbroking.com bhupali.gursale@angelbroking.com vinay.rachh@angelbroking.com amit.patil@angelbroking.com shareen.batatawala@angelbroking.com gosar.twinkle@angelbroking.com tejashwini.kumari@angelbroking.com

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