Stock views on POWER GRID CORP, NATIONAL ALUMINIUM, VOLTAS

BANK OF AMERICA on VOLTAS

Bank of America retains the `Buy' rating on Voltas and raises the target price to Rs 240, as the stock could re-rate to a PE of 16x FY12E driven by: (1) rising outlook of residential AC market; and (2) cyclical upturn in project business. Voltas, as the secondlargest AC company in India, with about 18% share, is a key beneficiary of the extremely strong demand growth being seen in room air-conditioners. Voltas is increasing its presence from four countries to seven countries to maximise growth. It is also expanding its presence in water treatment and industrial electricals to boost sales. Voltas suffered from excess demand for room ACs in April-June 2010, as it had to source components on short notice and, hence, at higher cost. An increase in margins in the engineering product segment (15% of FY10E profit), owing to stronger growth of textile and mining equipment having higher margins, could partly offset cost pressure.

CITIGROUP on NATIONAL ALUMINIUM

Citigroup recommends `Sell' rating on National Aluminium and cuts the target price from Rs 355 to Rs 297 on lower LME price forecasts. They continue to value Nalco's core business at 13x June 11 PE, to which they add cash per share of Rs 73 and arrive at a target price of Rs 297. At the target price, Nalco would trade at a PE of 14.2x and EV/EBITDA of 6.1x. The stock has run up 9% in the past six months probably due to the positive sentiment regarding possible disinvestments by the government. Citigroup expects limited downside price risk as it already seems to be discounting a significant economic slowdown. Key positives: 1) a modest deficit in 2011 and 2012; 2) at current prices ($1,900/t), about 30% of production is sub-economic; 3) production cuts in China due to falling margins and government measures; 4) Inventory levels are high but there is good potential for physically backed aluminium ETF. A 5% change in aluminium prices would impact FY11 and FY12 PAT by 15%. A 5% change in the Rs/$ rate would impact PAT by 16%.

MACQUARIE on POWER GRID CORP

Macquarie recommends `Underperform' rating on Power Grid Corporation. The PGCIL board, on 2 July, approved the follow-on public offer of 20% of existing paid-up share capital. The earnings forecasts are relatively in line with the market, while EPS forecasts are nearly 5-10% lower, as Macquarie factored in the new shares from the fresh equity issue. PGCIL may need to raise further equity in FY13/14. From an asset allocation perspective, regulated utilities underperform during periods of rising bond yields. Anticipated follow-on public offer (FPO) and equity raising this FY in addition to rising bond yields over next six months drive underperformance. On a PE basis, the stock is trading at 19x FY11E PE and 17x FY12E PE, a 20-30% premium to the sector. The price target implies a one-year forward PE of around 15-16x as a reasonable buying range.