One of the major reasons for the value of Nalco shares being curbed from being exponentially high is the price of aluminium which analysts predict might not increase by leaps and bound in the next five years.
Although industry experts do not doubt a moderate recovery of larger economies in the world, they definitely doubt the ability of demand to outpace supply.
There are large number of brownfield capacity expansion projects that are being implemented by major players. Also, a few capacities that have gone out of production is expected to resume production at the slightest hint of a recovery.
The global aluminium capacity is likely to increase by about 6.71 per cent from 22.755 million tonnes in June 02 to about 24.281 million tonnes in December 04. During the above period, the global alumina capacity is likely to increase by 5.44 per cent from 51.811 million tonnes to 54.631 million tonnes. However demand is likely to be more sluggish than the supply.
Aluminium is one of the slowest growing commodities in India compared to growth of 15 per cent and more in polymers, 8 per cent in copper. However, analysts feel that aluminium has grown only 4 per cent in the last ten years. Even liberalisation has not stoked any major demand, the compounded annual growth rate remains around 4 per cent. Aluminium demand has lagged behind even GDP growth over the last decade. Analysts do not expect a major fillip in demand and forecast a growth rate of not more than five years.
Nalco however has only to face the above mentioned worries. Most analysts are very bullish on Nalco. Analysts feel that cash-flows will constantly be on the rise. One broking firm expects pre-tax profit to exceed over Rs 16,000 crore.
The valuation for Nalco is taking into consideration the replacement cost of a similar capacity, works out to be around Rs 222 to Rs 225 per share. Other valuation parameters like peer group valuation multiple for the company is also very high.
Analysts felt that the major factor that will affect the valuations will be the cost of aluminium over the years. An analyst from an international broking firm said that, I dont see a sustained upward moment in the market as the demand-supply gap is unlikely to widen even in the next few years.
Analysts also expect that the return on investments in the aluminium sector is rather expected to fall in the near future. It is however the long-term player who will stand to gain. In the long-term, Nalcos fundamentals are comparable to Hindalco. In fact over the next three years it is expected to grow at a higher rate that Hindalco and at the same time increase its value-spread to the level of Hindalco. However it is trading at a discount to Hindalco.
The long-term Chinese demand for alumina holds the key, Chinas alumina imports have zoomed by nearly 88 per cent from 1.8 million tonnes in 2000 to 3.38 million tonnes in 2002. Further, the country has reduced the import duty on alumina from 18 per cent to 12 per cent. As a result, the global players are expecting China to be a major spot buyer of alumina in the international market.
However any drop in consumption in the Chinese markets might also destabilise the prices in the region. Nalco proposes to capitalise on a spurt in demand for alumina in China by exploring the possibilities of direct exports of alumina. The company would also explore such possibilities to Russia and the countries in the Middle East. The company has tasted initial success with plans to supply about 100,000 tonnes of alumina annually to Chinas Minmetals Group over the next three years. Currently, Nalcos exports are channelled through international trade houses. Ditto for aluminium consumption. The rise of the middle class, massive infrastructure needs and spurt in FDI inflow have driven up the demand for aluminium in China. The countrys domestic aluminium market is expected to grow by 12 to 15 per cent per annum for next few years. As a result, China is planning to add about 3 million tonnes of new capacity over the next five years. About 30 producers in 17 different provinces of the country have planned up capacity expansions to meet the growing demand.
For alumina, the country is forging alliances with companies like Nalco for a regular source of alumina to start with and to build alumina capacity in China in future. Likewise China Aluminium co and Alcoa Inc have proposed a joint venture to double alumina capacity to 8 ltpa by 2003. The primary aluminium production of select countries of the world fell by 3.02 per cent to 20.55 million tonnes in calendar year 2001. During the two months ended Feb02, the production in these countries continued their downward trend with a marginal 0.65 per cent fall in output to 3.359 million tonnes.