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The government of India is divesting 10% stake in Nalco via an OFS at Rs40/share (a 9.6% discount to its closing price as on March 14, 2013). Nalco, a Navratna company, is India third largest aluminium producer. The company has Asia 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. Nalco 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 company 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.Download Full Report