>RELIANCE INDUSTRIES (CLSA)

A multi billion dollar setback

Contrary to our expectations, the final judgement of the Bombay High Court in the Reliance-RNRL court case has directed Reliance to adhere to the letter of the private MOU between the Ambani brothers. This would require Reliance to supply 28-40mmscmd of gas to ADAG at $2.34/mmbtu potentially shaving off Rs160- 225/sh (US$4.6-6.4bn) from our target price of Rs1950/sh and 9-21% from FY10- 12CL EPS. Reliance has the option to appeal the verdict in the Supreme Court.

■ Bombay High Court asks Reliance to adhere to the exact letter of the MOU.
The Bombay High Court has ruled that the mid-2005 private agreement between the Ambani Brothers conceptualising the family de-merger is binding on Reliance; this is similar to the court’s Sept-07 pronouncement. Further, it has asked Reliance and RNRL to adhere to the exact letter of the private agreement on pricing, quantity and tenure and has directed them to enter into a suitable bankable contract within a month.

■ A negative surprise.
The judgement will require Reliance to sell 28mmscmd of natural gas to ADAG at $2.4/mmbtu for 17 years. Given that the government has mandated $4.2 as a floor price for contractual levies (royalties, profit share, taxes), this is akin to a direct transfer from Reliance to ADAG and comes as a significant negative surprise. Our reading of the earlier orders (albeit by a different judge) indicated that it was guiding both parties to be reasonable and viewed $2.34 as an unreasonably low price in the current environment. The MOU had also allowed ADAG to get a further 12mmscmd if the proposed contract with NTPC did not fructify; however the current court judgement does not explicitly rule if this should also be at $2.34.

■ Rs160-225/sh impact on FY10-end SOTP.
It is unclear how the case will progress if there is no agreement within a month; while Reliance has the option to appeal in the Supreme Court, the judgement suggests that RNRL may seek a change in the demerger scheme to force an agreement or even file for damages. In the interim, it is useful to note that should the government continue to adhere to its stance of $4.2/mmbtu being a floor price for contractual levies, it will shave off Rs160/sh from our FY10-end target price (Rs1950/sh) for Reliance and ~$600m annually from earnings. Should the contract begin even before ADAG’s power plants are ready (not likely before 2012), it will impact FY10-12CL EPS by 9-15%. If Reliance is required to sell 40mmscmd at $2.34, these rise to Rs225/sh and US$800m (14-21%) respectively.

■ Higher E&P upside holds the key.
While the court judgement is a setback, this may yet reverse in a future Supreme Court judgement. Reliance’s stock, however, is also discounting a resilient refining/petrochem outlook (we expect margins to contract) and significant E&P upside (we build in Rs327/sh, $10bn) on which, we note, there are no ADAG encumbrances (it has an option to buy up to 40% of all future Reliance gas but
at market prices). Ascribing higher E&P upside requires more disclosure or intensive drilling, though. Reliance’s decision to sublet a rig to ONGC is disappointing, therefore.


To see full report: RELIANCE INDUSTRIES

>GLOBAL SCENARIOS (DANSKE MARKETS)

A positive feedback loop

Global recovery theme to continue in coming quarters
- Lean inventories and record stimulus provide a powerful cocktail for growth

Leading indicators expected to continue to surprise to the upside
- The improvement likely to be visible in all regions, although strongest in US and Asia

G3 expected to get out of recession territory in Q3
- Growth rates to be strongest in US and Asia, but Euroland will benefit from higher exports as well

Underlying inflation to remain subdued due to high unemployment and excess capacity
- but a commodity driven rise in CPI could create jitters in certain markets

Central banks likely to keep rates unchanged for a long time
- Exit strategies to come in focus during 2009H2

INTRODUCTION

A positive feedback loop

■ The global recovery in 2009 is likely to be stronger than expected by consensus. We continue to expect the global recession to end in Q3 2009 and see this as one of the dominant drivers for financial markets in coming quarters.

■ A combination of very lean inventories and a recovery in demand from massive record stimulus packages will provide a major boost to world production – and trade – in the coming quarters.

■ The recovery will be strongest in the US and Asia but the rest of the world will see recovery through stronger exports on top of a realignment of production with demand as inventories are reduced.

■ Global housing markets were a major negative force in 2008. However we are starting to see signs of improvement in many countries and we believe the huge drag from housing will start to fade in 2009 and into 2010.

■ The negative feedback loop in late 2008 of falling production, rising unemployment, falling asset prices, weak housing markets and lower spending will (for now) be turned into a positive feedback loop in which rising production and higher asset prices lead to improved business and consumer sentiment – and thus in turn higher spending and a further rise in production.

■ Challenges may arise again in 2010 with as production is back in line with demand and as the effect from the economic stimulus fades. It is important that the recovery in 2009 is followed by renewed job growth which can take over as the main demand driver in 2010. We are moderately optimistic that this will be the case and look for growth around potential growth in 2010.

■ The world economy will for some time be very vulnerable to new shocks as the structural headwinds from deleveraging and falling house prices will continue to be a downward force on growth in many regions. Rising public debt levels means fiscal policy will have to be tightened at some point in the future. A key risk in 2010 could come from a renewed rise in the oil price. Renewed tensions in financial markets is also a risk to the recovery.

■ With a huge output gap globally we don’t see inflation as a major problem for now. However, there is the risk of a commodity-driven rise in inflation by end-09. As fears are evolving that the quantitative easing by central banks will ultimately lead to inflation, jitters could arise in certain
markets at any sign of inflation.

■ Central bank exit strategies will get more in focus as the global economy recovers. However, we expect the Fed to keep rates low for a long time in order to subsidize leverage in a time when deleveraging is one of the threats to the recovery. ECB will be more concerned about low rates but
growth is weaker in Euroland. We expect both the Fed and ECB to start raising rates in H2 10 barring any new negative shocks to the global economy.

To see full report: GLOBAL SCENARIOS

>EARLY, BUT FUNDAMENTALLY CORRECT (CIBC)

This report includes charts on following headings:

• A Shock Heard ‘Round the World'
• Bamboo Shoots
• Emerging Markets’ Savings Represents Potential Consumer Spending Power
• Historical Lag in Commodity Prices vs Global Industrial Production
• Global Oil Demand Drop Leaves OPEC with Spare Capacity
• Recent US Indicators Still in Recession Range
• US Economy: Sharp Recession, Sub-Par Recovery
• A Penny Saved ... is a Penny Not Spent
• Fed Not Repeating Japan’s 1990s’ Errors
• Fed Has the Printing Press Running Full Speed
• The Banking Crisis is Over
• Fiscal Stimulus is Massive
• Past War Debts Were Inflationary Look For 5%+ US CPI in 2011
• US Dollar on Long-Term Slide
• Canada’s Recession: Steeper Dive This Time
• Recovery Will Also Be Sub-Par
• Milder Decline in Household Net Worth
• Canadian Banks Less Levered Pre-Crisis
• Non-Financial Debt/Equity Lower in Canada
• Government Dissaving Will More Than Offset Household Saving
• A Structural Shift in Canadian Trade
• C$ Now More Responsive to Commodities
• C$ Move Looks Early vs Commodities
• TSX Cheap vs Long-Term Earnings
• TSX Spring Move Eclipsed Any Pre-Recession-End Rally
• Corrective Rallies Will Be Short-Lived But Canadas Will Outperform
• Gov’t of Canada Issuance Elevated vs Deficits
• Less Pressure from Canadian Borrowing Less Temptation to Inflate Debt Away
• Provincial Deficit Target Near $30 Bn Based on Earlier, More Optimistic Forecasts
• Still Some Room for Spread Narrowing

To see full report: ECONOMIC UPDATE

>SUZLON ENERGY (MORGAN STANLEY)

Ready to Grow

Recuperation: Suzlon has largely restructured its balance sheet and hence some short-term risks have eased. The focus has shifted to a slower and perhaps longer part of the healing in terms of winning new customer orders and regaining its growth trajectory. With steady fossil fuel price increase, positive global policy risk for wind power and likely interest rate and export incentives from the Indian budget, we expect Suzlon’s growth and margin outlook to improve. Near-term worries may arise from lower shipments, lower margins and lingering concerns over stretched
balance sheet. We have lowered our shipment FY09 and FY10 estimates by about 250MW to reflect weak new orders in the domestic market this year and a smaller order backlog of 1,250MW.

Potential Positives: If the oil price were to continue to rise above US$85/barrel, it would make wind power cost competitive (with a nominal carbon cost), without any subsidy, thereby improving the FY11/beyond outlook.

What’s Changed?
Some near-term risks have eased, however, operating conditions remain difficult, in our view. In the interim, the stock price has increased by 85%+ over the past few weeks, outperforming the Sensex by 50%.

1. Shipment Estimates: Based on our recent discussions we gather that domestic orders in March quarter were weaker than our previous estimates. As a result, the shipments in FY09 were likely lower than our previous estimate of 2,750MW. We have lowered our estimate to 2,500 MW for FY09 and 2,450MW for FY10. Due to the high operating leverage, this has reduced our net profit by Rs1.8bn for FY09e and Rs1.9bn for FY10e.

2. Lower Margins: Due to higher costs related to capacity expansion and existing inventory at high costs, we believe that Suzlon’s EBITDA margins may be lower than our initial expectation for FY09 as well as FY10. We now factor in an EBITDA margin of 13.6% and 12.4% for FY09e and FY10e, respectively. This has reduced our net profit estimate by Rs3.5bn for FY09 and Rs450mn for FY10.

3. RE Power Results: Since our last report, RE power has released FY 09 results and FY 10 guidance as well, which were better than our expectation.

4. Balance Sheet Risk: Besides restructuring its CBs, Suzlon has also successfully renegotiated its outstanding acquisition debt of €503m. It has secured a covenant holiday. However, it has to pay an additional interest of 150bps only compared with our initial expectation of an additional 300bps.

5. CB and Debt Restructuring: Suzlon has restructured a large part of its outstanding CBs. As a result, there are now four categories of CBs outstanding, and in the process, it has reduced its outstanding debt by US$111mn. This has also resulted in exceptional gains of US$70mn (due to
buyback of the CBs at 55 and reissuance of CBs at 60) to be booked in FY10.

6. Equity Dilution: Due to new CBs issued with a conversion price of Rs76 per share, we believe that there could be an immediate equity dilution with up to 37mn new shares (2.5% of outstanding shares).

Where We Differ: Lower than Consensus
While our revenue, EBITDA and EBIT forecasts are slightly higher than the consensus expectations, our net profit and EPS estimates are lower than the consensus.

We believe that the consensus may be factoring a very weak new order and shipment outlook for the industry and the Suzlon group companies, resulting in the low revenue forecast. We are
assuming WTG shipments (Suzlon + RE Power) of 3.9GW and 4.4GW, respectively, for FY10e and FY11e, which implies growth of 2% in FY10e and 13% in FY11e. We believe that these are very conservative considering the long-term industry growth forecast of 14-15%.

1. Inflection in Global Wind Demand – While consensus expects about 9% growth in global wind demand in 2009 and 20% in 2010, we expect no growth in FY09 and 27% growth in FY10. We think FY10 should mark an inflection point for global wind demand and Suzlon should be well
positioned to grow strongly in FY11.

2. Inflection in India and US Demand – Due to potential decline in wind demand in India and the US (two of the largest markets for Suzlon) this year, we expect a strong rebound next year that should benefit the company

We suspect that the consensus estimates may be factoring a decline of 8–9% in FY10 and then 13% growth from this low base.

To see full report: SUZLON ENERGY

>INDIAN HOTELS COMPANY LIMITED (MORGAN STANLEY)

F2009: Dismal year

Quick Comment: Impact on our views: Indian Hotels reported F2009 standalone revenues of Rs16bn (down 8% YoY) and standalone net profit of Rs2.3bn (down 38% YoY). Standalone EBITDA was Rs4.9bn (down 30% YoY), while operating margin was lower by 959 bps YoY. On a consolidated basis, revenue in F2009 was Rs26.9bn (down 8% YoY), while reported net profit was Rs125m (down 96% YoY). Consolidated EBITDA was Rs5.6bn (down 37% YoY), while operating margin was lower by 976 bps YoY. The weak performance during the year was for various reasons, including a slowdown in the global economy and the Mumbai terrorist attacks in November 2008, which led to a slowdown in tourism traffic. The company has not disclosed any information on the financial performance of its subsidiary companies (primarily the US, UK and Australian properties) and hence we are unable to comment on the same.

What's new: The company commissioned 1,176 rooms in F2009 leading it to have a year-end room inventory of 11,546 rooms, thus making it the largest hotel company in India. In addition, IHCL will acquire an 85% stake in ELEL Hotels & Investments Limited (which owns the
Sea Rock hotel in Mumbai) for a total consideration of Rs6.8bn. This excludes any amount that the company would spend on refurbishing the property.

Consolidated debt stood at Rs46bn at the end of March 2009 (standalone debt was Rs17.7bn) and the company had a cash balance of close to Rs4.5bn.

Investment thesis: We believe F2010 will be worse for earnings for the company as weakening demand for rooms will force down both average room revenue and occupancy rates thus pressurizing operating margins. Rising interest costs due to high leverage will also affect earnings. As a result we maintain our Underweight rating on the stock.

To see full report: INDIAN HOTELS

>MEDIUM TERM INFLATION RISKS (DEUTSCHE BANK)

Medium-term inflation risks – how much of a threat are they?

Rarely has the inflation outlook given rise to such differences in opinion as today. While some experts – including the OECD – warn against deflation, others believe inflation will accelerate strongly in the medium run.

To be sure, monetary and fiscal policies are currently moving in unknown territory so – of course – caution is advised in the analysis. However, we consider worries about inflation to be exaggerated, even on a 3 to 5-year horizon.

Such worries have been triggered by the huge expansion in central bank balance sheets. But this does not automatically lead to a surge in the money supply, as recent data on money supply growth in the euro area has shown.

When the credit multiplier returns to normal, both the Fed and the ECB will scale back their open-market operations to mop up liquidity. The same holds for fiscal policy with the current attempts to at least partly offset the slump in private-sector demand. Scenarios for reducing the massive budget deficits are already being developed both in the US and in Brussels, to be
implemented once business activity picks up again.

Permanent monetisation of public-sector debt by the central banks or its reduction via higher inflation are unlikely on account of the following structural changes:
— Independent central banks which safeguard the efforts expended on anchoring inflation expectations at a low level.

— The increasing role of international capital markets that are needed for the seamless refinancing of public-sector debt (around one-seventh per year). In addition, the vast majority of new issuance is acquired by institutional investors that react extremely quickly to changes in the inflation outlook. Higher inflation and thus rising interest rates therefore do not represent an attractive option for governments.

— The low money illusion of households that reduces the opportunity for policymakers to levy a stealth “inflation tax”.

— The growing inflation aversion of ageing societies with large financial wealth and on average fewer opportunities to save more to offset the depreciation of their assets caused by rising inflation.

— As much as 38% of outstanding US Treasuries are held by the US social security system. Since pension insurance payments are index-linked, higher inflation would cause huge problems.

In light of the deep recession and dramatic capacity underutilisation, inflation looks set to remain extremely moderate in 2009 and 2010 – in some cases price levels will fall – and not exceed 2-3% p.a. in the larger industrial countries over the medium term.

To see full report: INFLATION

>METAL SECTOR (EMKAY)

Visibility Rising

The macro business environment for all the domestic metal companies seems to be improving, with the increased thrust on infrastructure spending by both India and China. This seems to have provided better visibility to the targeted volume growth by the domestic companies. Moreover, to shield from the meltdown, all the companies have embarked upon huge cost reduction programs, which will provide the much needed cushion to the falling margins due to steep fall in realizations. Most of the companies have shown the actual reduction in cost of production in their earnings. The steel prices seem to have bottomed out and with the improvement in demand, they may catch the northward trend. Considering all these factors, we are giving higher multiples and upgrading all the metal stocks under our coverage

Improving business environment
The macro business environment for all the metal companies seems to be improving with the increasing willingness of the government to spend more on infrastructure development. The same is visible even in China. This is expected to give more visibility to the targeted volume growth by the companies. This may also improve the valuation multiples of the companies leading to higher valuations

Prices seem to have bottomed out
The steel prices seem to have bottomed out giving strong indications that prices may not fall from current levels and with improvement in overall demand scenario, prices may start increasing. Prices in China have increased to around USD440/t from USD400/t FOB. Considering freight and insurance of USD20/t and import duty of 5% in India, the landed cost comes to around USD480/t. The Indian prices are currently around USD500/t. If the domestic steel producers are not allowed to increase prices by the Government, then the imposition of anti dumping duty seems to be less likely as there will not be any significant disparity in the domestic prices and landed cost.

Cost reduction programs to improve margins
Taking cue from the contracting margins, most of the players have embarked on cost reduction programs to maintain their margins. Corus announced 40% production cuts, job cut of around 3,500 employees and other performance improvement programs to reduce cost and increase efficiency. JSW has announced various measures to increase efficiency, optimizing input blends and lower raw material prices (basically undoing the wrong dones during peak times). Sterlite is also targeting to reduce cost of production across divisions, especially aluminum – to reduce cost from as high as USD1,400-1,500/t to around USD900/t and zinc from USD680/t to around USD600/t. Sesa Goa is planning to reduce its mining cost by improving logistics and increasing productivity.

Revision in Target Price
We are revising upgrading Tata Steel from REDUCE to HOLD, with revised target price of Rs489 (1.3x FY11E book value and 4.7x FY11E EPS of Rs103), upgrading JSW Steel from REDUCE to HOLD with revised target price of Rs673 (1.2x FY11E book value and at 11.3x FY11E EPS of Rs59.8), upgrading Sesa Goa from REDUCE to BUY with revised target price of Rs243 (2.2x FY11E book value and at 7.6x FY11E EPS of Rs31.8), upgrading Godawari Power from HOLD to BUY with revised target price of Rs166 (0.7x FY11E book value and at 3.6x FY11E EPS of Rs46.3), downgrading Sterlite Inds from BUY to HOLD with revised target price of Rs738 (1.3x FY11E book value and at 12.9x FY11E EPS of Rs56.9) and revising target price of Monnet Ispat to Rs274 (0.85x FY11E book value and at6.2x FY11E EPS of Rs44.4).

To see full report: METAL SECTOR

>JAGRAN PRAKASHAN (KR CHOKSEY)

INVESTMENT RATIONALE

Jagran Prakashan Limited is a leading media house of India which publishes Dainik Jagran, India's largest read daily with a total readership of 56.6 million readers per day (IRS 2008 R1). It was also voted the most credible and trusted newspaper in India, according to a survey by Globscan, conducted in 10 of the world's leading countries, including the US, UK, Germany and Russia. JP has not only consolidated in its home market but expanded aggressively, launching 17 new editions in last five years. Led by quality content JP has expanded circulations at 14% CAGR in last five years and ad-revenue has grown faster at 26% CAGR accounting for 65% share. The Indian newspaper industry can be broadly categorized as (1) Hindi, (2) English and (3) the other Indian languages. The Hindi language newspapers comprise 44.6% of the total newspapers while the English ones make 7.4% of the same. The other languages comprise the remaining 48% of the newspapers.

Key Developments
Directorate of Advertising and Visual Publicity (DAVP)
The Directorate of Advertising and Visual Publicity (DAVP) has increased the advertisement rates by 24% across the board with effect from September 1, 2008. For the company DAVP contributes 10-15% of the advertising revenues. Expected to receive waiver for custom duty

The concessions include full exemption in customs duty on newsprint as well as on uncoated paper used for printing of newspapers, commonly known as 'glazed newsprint', and also full exemption in customs duty on light weight coated paper used for printing magazines.

The newspaper and magazine publishing sector had sought relief from the Information & Broadcasting Ministry in the wake of the sharp rise in international prices of newsprint and light weight coated paper (used for publishing magazines), which had resulted in a significant increase in publishing costs. Falling advertising revenues due to the recent economic slowdown have also affected this sector.

Valuations
As the CMP of Rs 77.3, Company is trading at a 27.3x TTM EPS of 2.83. The stock is trading at higher PE than its peer group, but it deserve the premium valuation as being the market leader in North India and IRS 2008 reaffirmed 10th time in a row No.1 status of Dainik Jagran in the country across all languages with a total readership of 56.6 million.. We believe that stock is reasonably valued and can be accumulated at these prices. We recommend “BUY” on the stock with an target price of Rs 92 , with represent an upside potential of 19%.

To see full report: JAGRAN PRAKASHAN

>GUJARAT NRE COKE (MACQUARIE RESERACH)

Coke back in favour

Event
■ Coking coal outlook brightens: Our global team has raised its coking coal price forecast by 17% for FY11, buoyed by China turning a net importer of coking coal and a possible restart of steel capacity globally. For Gujarat NRE Coke (GNC) We have upgraded earnings and increased our target price to Rs87 from earlier Rs58. We maintain an Outperform rating.

Impact
■ Upgrading coking coal forecasts: The recent settlement of coking coal at US$129/t was surprisingly strong, as the expectation was for around US$100–110. More so, the reminder of coking coal quantities left from last year’s contract at US$300 has not be waived off. Given this backdrop, our team has raised its FY11 forecast to US$129 from US$110.

■ China – the big swing factor: Some of the Chinese coking coal mines have faced closure on account of safety concerns post fatal accidents. This, coupled with Chinese steel production back to an all-time high, has turned China into a net importer. In fact, the Chinese government has always discouraged the export of coke, imposing a 40% export tax. Because China used to contribute 14Mnt out of 19Mnt of the global sea-borne trade, any rebound in global steel production would likely bode well for coke prices.

■ GNC – on track to increase production sevenfold in next three years: GNC owns two coking coal mines in Australia, with 580Mnt reserves and a current mine coal production run of 1Mnt. The company is well on course to raise production to 7Mnt by FY13E. We estimate production to be 1.8Mnt in FY10, 2.5Mnt in FY11 and 3.5 in FY12, a bit lower than earlier estimates, as the company slows capex.

■ Capacity increase just in time: GNC has augmented its coke capacity by 25% to 1.25Mnt. We are increasing our coke production estimates by 25% and 4% for FY10 and FY11 to 940kt and 980kt, respectively.

Earnings and target price revision
■ We are increasing our FY10 and FY11 EPS estimates by 50% and 204%, respectively, and are increasing our sum-of-parts target price to Rs87 from Rs58.

Price catalyst

• 12-month price target: Rs87.00 based on a Sum of Parts methodology.
• Catalyst: Increased visibility on its capex and production schedule.

Action and recommendation

■ Maintain Outperform: We believe GNC remains the best stock in which to invest to take advantage of the upturn in the coking coal cycle. GNC has good quality reserves, an excellent location and is well on its way to becoming one of the world’s top-ten producers of prime hard coking coal in next three years. The stock is trading at attractive valuations of around 9x PER and around book value.

To see full report: GUJARAT NRE COKE

>NATIONAL ALUMINIUM COMPANY (RELIANCE MONEY)

Catastrophic performance

National Aluminium Co. Ltd. (Nalco) has delivered its worst ever performance in last 16 quarters - courtesy low LME Aluminium prices which are currently trading at slightly above cost of production ($1500 per tonne). Nalco posted Net sales revenue of Rs. 10.9 bn (down by 23% (YoY)), an EBIDTA of Rs. 0.58 bn (YoY decline of 90%) and a PAT of Rs 0.83 bn (drop by 80%). The other income of Rs 1.45 bn has saved the day for the company. The EBIDTA margins have been cut
by 3498 bps (YoY) to 5.4%.

Aluminium prices to be under pressure:
LME Aluminium prices had been trading in the band of $1400 - 1500 per tonne before sharp jump by about $200 per tonne on the news of supply shocks from Russia and the LME Aluminium inventory has risen to a whooping 4.27 mn tonne which is approx. 10% of the last year's total global Aluminium consumption. Plummeting prices are the result of collapse of demand for Primary Aluminium. Demand has been crushed by a major drop in the end market demand globally and greatly exacerbated by inventory destocking through out the supply chain. Currently, the Aluminium metal stock at LME is at the level of about 6.5 weeks' consumption. It is expected to grow to level of about 8.4 weeks' consumption by the end of CY09. The increasing inventory at LME is expected to keep pressure on the prices. Secondly, the supply demand mismatch in the Aluminium market
is expected to be extant till FY11E. We estimate around 6 mmT of stock inventory at LME by CY11E though the growth in inventory may have flattened by then.

EBIDTA margins are expected to be squeezed
Cap on Aluminium prices coupled with rise in the input cost due to a) expected rise in CPC and CTP cost and b) increase in cost of Bauxite ( Due to labour problem post Naxal attacks in Bauxite mines), the EBIDTA margins of the company are expected to drop sharply. We envisage an approx. 1100 bps of cut in EBIDTA margins of Nalco in FY10E over FY09. Though we expect a dismal performance of the company in FY10E, it is expected to improve in FY11E due to partial addition of the capacities from 3rd phase of expansion. We have assumed an average LME Aluminium price of $1825/tonne and $1950/tonne for FY10E and FY11E respectively and exchange rate of Rs 47/$ and Rs 46/$ respectively.

Valuation:
At CMP, the stock is quoting at an EV/EBIDTA of 10.2x for FY11E earnings. Due to the huge LME inventory, we expect the LME Aluminium prices to be range bound. We perceive the stock to be currently quoting at stretched valuations and recommend a Sell with a price target of Rs 287 at which it will quote at an EV/EBIDTA of 8x for FY11E earnings. The target price also quotes at the P/E of 13.8x FY11E earnings which is roughly near the mean of the P/E band. We would like
to issue a rider that being a PSU, the company is likely to feature in the disinvestment list as GoI controls 87% of the stock. Any news on disinvestment will take the stock to further highs though it may not be backed by fundamentals.

To see full report: NALCO