National Aluminium Company Ltd. (NALCO) – Buy, Target-₹175

National Aluminium Company Ltd. (NALCO), established in 1981, is a top aluminium producer in Asia, involved in the entire production process, from bauxite mining to making various aluminium products like ingots, wire rods, and sheets. Based in Odisha, India, NALCO has large production capacities for its operations, including mining, refining, smelting, and power generation. 

The company is focused on cutting costs and supporting the environment by using wind and solar power. It also collaborates with others, like Gujarat Alkalies & Chemicals Limited and Odisha Industrial Infrastructure Development Corporation, to enhance the aluminium industry’s growth through new projects and an aluminium park.

Why should you invest in NALCO?

Integrated operations and strong credit metrics despite industry headwinds
NALCO fully supplies its own bauxite for aluminium production, giving it a cost advantage as one of the world’s cheapest alumina producers. 

It also has its own 1,200 MW coal-based power plants, meeting all its aluminium smelting needs, with most coal coming from a deal with Mahanadi Coalfield Limited. Its facilities are conveniently near raw materials, saving on transport costs. 

Historically, NALCO had more assets than debt and low interest costs, helping it keep debt levels lower than many competitors while still making good profits.

Strong profitability expected from hereon
NALCO saw a dip in profits due to lower aluminium production and rising costs, especially for power and fuel, in the last quarter. 

However, they plan to reduce coal costs by increasing their own coal production. They also expect to make more money from selling alumina next quarter. 

Plus, NALCO’s efforts to control more of their production process and secure their energy and bauxite supply will strengthen their business for the next 30 years.

Valuation and Outlook

In 2023, India’s aluminium demand stayed strong amidst global challenges, benefiting from positive economic indicators and the government’s focus on electric vehicles (EVs), which extensively use aluminium. 

Expectations are that aluminium prices will fluctuate between USD 2,100 and 2,300 per tonne. NALCO’s strategic projects, like the 5th stream refinery and development of Pottangi Bauxite mines, aim to boost earnings. 

Additionally, a venture into lithium mining in Argentina with Khanij Bidesh India Limited highlights NALCO’s efforts to secure essential materials for EVs, promising cost efficiencies and revenue growth. 

Given these factors, NALCO is recommended as a “BUY” with a target price offering a 15% upside, based on a valuation of 6.7x FY25E EV/EBITDA.