Nalco: earnings driven by better pricing

ANALYST'S CORNER

Refco Securities has upgraded its' rating for Nalco to Outperformer. The report has a positive outlook on the stock. Even as aluminium prices have stablilsed in the range of $1850-1950, prices are expected to move up owing to low inventories and shutdown of unviable capacities in Europe.

Nalco sells about 75-80 per cent of its alumina on long-term contracts and would be re-negotiated in December. While volume growth would be visible only in FY08, better pricing would drive earnings.

The report revises its EPS estimates for FY06 from Rs 16.4 to Rs 19.2. The revised P/E is 11x. However, the report adds that aluminium production is expected to face cost pressures. Nalco procures its coal requirements from its linkages with Mahanadi Coalfields.

Owing to overall shortage, Mahanadi is able to meet only 80 per cent of Nalco's requirements, with rest being imported at about $60 per tonne. This has pushed up power costs by about 10p per unit.

Surya Pharma: value-based growth

KJMC Research report states that Surya Pharma management is upbeat on the prospects of the new deals in CRAM business along with consistent order from the domestic pharma companies.

The plants are deluged with the orders from the existing and new clients, which have extended working hours along with two shifts in the plants.

The report said that revenues from the formulations business will grow enormously in the FY06E and FY07E together with new generations off-patent APIs.

However, Surya pharma's metamorphosis into new generations drug company is lot depended on the implementations and commercial induction of Jammu plant by FY07E.

In short, the company endeavours into value-based business growth from volume-based business portfolio. The management expects to achieve sales of Rs 270 crore and Rs 375 crore in FY06E and FY07E, respectively.

Expected PAT to realize are Rs 21 crore and Rs 35 crore. The stock trades at P/E of 11.2x and 6.7x for FY06E and FY07E, respectively.

Ranbaxy: gearing up for mega deals

Refco Securities maintains its Market Performer rating on Ranbaxy. The report states that the company has decided to raise $1.5 billion through ADRs/FCCBs.

Although the company has not mentioned any specific reasons for raising such a big amount, the report believes that this is being done mainly for funding potential acquisitions. The company has indicated in the past that it is looking for acquisitions in USA, Europe and India.

The acquisition could be significantly large. Since the timeline for acquisitions is uncertain, the report believes that the fund raising program will dilute the company's earnings and return ratios in short-term.

Some of the recent acquisitions have been done at expensive valuations and the company may overpay for the same. It is currently valued at 41x CY05E and 26x CY06E.