Why this undervalued PSU giant demands investor attention

But every few years, one PSU rises above the noise and quietly rewrites its own story. Right now, that is a metals giant that resembles one in all the ways that matter: stability, capital efficiency, a fortress balance sheet and enviably low valuations.

That stock is Nalco.

National Aluminium Co. Ltd (Nalco) has just delivered its best-ever Q2 FY26 and H1 FY26 performance, creating a valuation gap that’s hard to justify. Despite higher volumes, expanding margins and a large capex cycle about to unfold from FY27, the market still prices Nalco at single-digit earnings multiples. Such levels are usually reserved for stressed lenders, not a globally competitive alumina producer.

The company’s standalone ROE in FY25 was 32.3%. It carries no debt, sits on nearly ₹80 bn of cash (as of September 2025) and can fully fund its expansion pipeline. And yet the stock trades at only 7.8 times earnings.

Over the past year, however, the stock lost momentum as alumina and aluminium prices cooled from their peaks, dragging down sentiment across the broader metals sector. June quarter didn’t help either. Softer realisations, near-zero metal exports and the monsoon-led dip in domestic aluminium demand made the quarter look weak. Operating profit also slipped as costs didn’t fall in line with prices.

But none of this signalled a structural issue. It was simply the commodity cycle at work. The kind of short-term volatility that long-time NALCO watchers are familiar with.

Which is why the sharp rebound since then has been so striking.

A Turnaround Hiding in Plain Sight

The September quarter (Q2FY26) made the shift visible. Revenue grew 7% year-on-year. But the real momentum was in volumes as alumina sales jumped 39% to 396 kilo tonne. This came from alumina exports, up 33%, and domestic alumina, up three times.

Additionally, the segmental margins expanded. Power and fuel costs were lower as captive coal ramped up, making Q2 one of the strongest quarters showing in Nalco’s history.

A key part of this resurgence lies in the company’s changing cost structure. Captive coal is now expected to meet nearly 57% of its requirement, giving Nalco a structural cost advantage. This alone has helped it climb meaningfully down the alumina cost curve.

The flipside is that near-term volume growth remains capped. Execution delays have pushed back the ramp-up of new capacity, and until these expansions come online, Nalco remains a pure play on alumina and aluminium prices, a business whose earnings still track global commodity cycles.

That’s exactly why the next expansion phase matters so much.

The Expansion Nobody Is Pricing Correctly

Two upgrades define the next leg:

First, the 1 million tonnes per annum (mtpa) alumina refinery expansion, now 80% complete, is set to go live. This lifts refining capacity from 2.1 mtpa to 3.1 mtpa, adding around five lakh tonnes of alumina in FY27.

Second, the 0.5 mtpa aluminium smelter, backed by a 1,080 MW (megawatts) captive power plant. DPR work is underway and commissioning is targeted for 2030. This marks the start of a new multi-year scale-up in metal capacity.

Together, these projects represent nearly ₹30,000 crore of capex. Nalco will raise some debt to fund the smelter and power plant. But the management suggests the balance sheet remains strong enough to avoid heavy leverage, backed by nearly ₹8,000 crore of cash and robust annual cash flows.

A Cost Advantage the Market Underestimates

Nalco’s moat is its cost. Even with alumina spot prices hovering around $320–340 per tonne, profitability holds. This is thanks to lower power costs from captive coal and steady efficiency gains across the refinery. Every tonne of in-house coal directly boosts margins in both alumina and metal.

Valuation: A Classic Mispricing

For a company delivering rising volumes, a stronger cost base and a fully funded growth cycle, the valuation still feels stuck in the past. At 7.85 times earnings, Nalco trades at a steep discount to peers with similar return profiles. Even on EV/EBITDA, the stock sits at 4.5x. These kinds of levels the market typically reserves for companies with balance-sheet stress or fading industry relevance, neither of which applies here.

The dividend adds another layer of comfort. At roughly 4.5%, the yield quietly pays investors to wait while the larger rerating thesis plays out.

What the market seems to be missing is that Nalco’s earnings profile is slowly shifting from cyclical to structurally stronger. The volatility hasn’t disappeared, but the floor has moved up.

Is a Rerating on the Horizon?

Reratings rarely happen when numbers are bad. They happen when:

• the worst is behind,
• the cost curve moves decisively lower,
• capacity comes online, and
• cash generation stays strong.

Nalco is ticking each of those boxes. The Q1FY26 volatility is behind it, Q2/H1 show improving economics and the next 24–36 months bring a clear path to higher volumes. With captive coal doing the heavy lifting on cost and the refinery expansion around the corner, the earnings base is set to expand meaningfully once the cycle turns.

The timing is the only unknown, but the direction is becoming harder to ignore.

Conclusion

Nlaco isn’t just another PSU. It’s a structurally improving business caught at an interesting inflection point. Costs are falling, cash flows are rising and large parts of the capex cycle can be funded internally. Yes, near-term volumes are constrained and the company remains tied to alumina and aluminium price swings.

But with the expansion phase approaching, the combination of a stronger cost base, higher future volumes and a stubbornly low valuation creates a setup that long-term investors may want to pay closer attention to.

Happy Investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com