Founded in 1981, Headquartered in Bhubaneswar, India, NALCO is an Indian Central Public Sector Enterprise (CPSE) and its largest bauxite, alumina and aluminium processor. Currently, the Indian government owns 51.3% of NALCO’s equity capital. The company operates captive bauxite mines at Panchapatmali and Aluminium refineries and smelters at Damanjodi and Angul in Odisha with the sale of metals making up 64% of FY24 (ending March 2024) revenues and chemicals (alumina) contributing 34%. Exports made up a third of FY24 revenues of INR130bn. NALCO is among the ‘Navratna’ group of CPSEs, which allows management greater operational autonomy and flexibility. NALCO has a 6.8mn TPA Bauxite Mine & 2.1mn TPA (normative capacity) Alumina Refinery located at Damanjodi, 0.46mn TPA Aluminium Smelter &1200MW Captive Power Plant located at Angul.

Aligning expansion plans to meet demand growth

Aluminium is one of the most widely available metals on Earth. Due to its light weight, corrosion-resistance, and ability to be cast into any shape, aluminium has wide applications across multiple industries including food packaging, automobiles, and aerospace. Apart from China, India is another major player in the global market as the second-largest production centre and third-largest demand centre. Global aluminium demand is expected to increase 40% by 2030, mainly driven by the electrification trend in automobiles, green energy transition, and infrastructure. Demand in India is also expected to almost double to 9.0mn MT in 2033 from 4.9mn MT in 2023 on the back of significant infrastructure development in railways, airports, and highways expected across the country in coming years.

Considering the industry tailwinds, NALCO is looking to expand its production capacities through the ‘5th stream addition’ project that will increase aluminium production by 1mn MT. The company already has sufficient backward integration through the caustic soda JV, power generation from coal, wind, and solar plants, and considerable bauxite mining reserves. Despite this, they are investing to further strengthen the supply chains. To this end, the 5th stream addition project will operationalise the Pottangi bauxite mines with 75mn MT reserves and the company has taken on two additional coal blocks at the Utkal mines that have a peak production capacity of 4mn MT. 25.5MW of wind power is also being added at Kayathar, Tamil Nadu.

Recent recovery helped by supportive regulatory changes

Despite the decent 6.5% CAGR over FY15-24, NALCO revenue growth has been volatile which is consistent with the highly cyclical nature of the meals and mining industry. There have been three years of revenue degrowth- FY16 (-7.6% YoY) because of lower aluminium realisations, FY20 (-23% YoY) from the Covid pandemic, and FY24 (-7.1% YoY) due to lower Alumina and Aluminium prices despite achieving highest-ever bauxite (7.5mn MT) and aluminium (463k MT) volumes. The revenue trend has been similar for its domestic aluminium peers Hindalco Industries and Vedanta Limited.

Alumina and aluminium prices recovered in 1H25, helping NALCO revenues grow 10.3% YoY to INR69.9bn. The strong operating leverage and lower manufacturing costs from higher usage of captive coal sources meant EBITDA more than doubled to INR26.1bn, with margins expanding 20% to 37.3%. The aluminium divisions of Hindalco and Vedanta outperformed NALCO with revenue growth of 14% each though EBITDA margin expansion was lower at 10.6% and 15.7% respectively.

NALCO pays dividends in accordance with the Department of Investment and Public Asset Management (DIPAM) guidelines, which state that CPSEs need to pay at least 30% of net profits or 4% of net worth as dividends. The company has been compliant with these rules, with FY24 payout at 36%. Although consensus forecasts for dividend payout are in the 24-27% range for FY25-27, the actual payout is likely to be above 30% as per the DIPAM rules.

Attractive valuation despite share price run-up

The NALCO stock has performed strongly in 2024, with YTD returns of 66.98%. Despite a substantial run-up in prices the company is currently trading at a P/E multiple of 10.2x, in-line with its local peer Hindalco (9.8x), but below its global peers (13.2x), 10-year historical average (14.2x) and its local peer Vedanta (13.3x). Additionally, on EV/EBITDA multiple it is currently trading at 6.2x, largely in line with global peers (5.9x), 10-year historical average (5.8x) and its local peer Hindalco and Vedanta at 5.8x.

NALCO is an interesting investment case with favourable asset structure and supportive industry dynamics. In addition to the Chinese withdrawal of export tax rebate, the industry is benefiting from tailwinds of higher alumina and aluminium prices from disruption in bauxite supplies around the world even as metal demand stays stable. This should help sustain the recovery in aluminium prices. The completion of the 5th stream alumina refinery expected by September 2025 should provide a revenue boost. Further, commissioning of the Utkal coal blocks should help reduce coal costs, thereby improving margins and cash generation. On the other hand, lower-than-expected demand from weak growth in automobile volumes and slowing EV transition could normalise alumina and aluminium prices and impact the financial performance. The cyclical nature of the industry and unpredictable geopolitical risks are structural risks in the stock.