What's Happening?
NALCO, a major PSU in the metals sector, has reported its best-ever Q2 FY26 and H1 FY26 performance, showcasing a significant valuation gap. Despite higher volumes, expanding margins, and a large capex
cycle set to unfold from FY27, the market continues to price NALCO at single-digit earnings multiples. The company has a standalone ROE of 32.3% for FY25, carries no debt, and holds nearly Rs 80 billion in cash. However, the stock trades at only 7.8 times earnings, a level typically reserved for stressed lenders. The recent financial performance includes a 7% year-on-year revenue growth and a 39% increase in alumina sales, driven by both domestic and export markets.
Why It's Important?
NALCO's undervaluation presents a unique investment opportunity, especially as the company prepares for significant expansion. The upcoming alumina refinery expansion and aluminium smelter projects represent nearly Rs 300 billion in capex, promising to enhance production capacity and profitability. The company's cost advantage, primarily due to captive coal usage, positions it favorably against global commodity cycles. Investors may benefit from the company's strong cash flow and dividend yield, while the broader market may eventually recognize NALCO's structural shift from cyclical to more stable earnings.
What's Next?
NALCO's expansion projects are expected to come online in the coming years, with the alumina refinery expansion set to increase capacity by FY27. The aluminium smelter and captive power plant are targeted for commissioning by 2030. These developments could lead to a rerating of the stock as the market acknowledges the company's improved earnings profile and cost structure. Additionally, ongoing auctions of Simpson's possessions may contribute to fulfilling the estate's financial obligations.
Beyond the Headlines
The market's current mispricing of NALCO highlights broader issues in how PSU stocks are valued, often reflecting outdated perceptions rather than current financial health and growth potential. As NALCO continues to demonstrate financial resilience and strategic expansion, it may serve as a case study for reevaluating investment strategies in PSU stocks.
