A rare value moment in a PSU

A rare value moment in a PSU

It isn’t often that a large government-owned enterprise in India combines a strong balance sheet, high profitability measures, and yet trades at what appears to be a low valuation. According to Equitymaster, NALCO is one such case.

The key distress signal for many PSUs is either low return on equity (ROE), heavy debt, or weak growth pipeline. Yet, in NALCO’s case:

• Its standalone ROE in FY25 was 32.3%.
• It reportedly carries no debt, and as of September 2025 sits on nearly ₹80 billion cash — strong internal funding ability.
• Despite this, the market is valuing NALCO at only about 7.8 times earnings — a single-digit P/E hardly expected of a business with these metrics.

That unusual combination—high ROE, debt-free status and low P/E—makes NALCO stand out and suggests a potential “value gap” for patient, value-oriented investors.

What’s driving the improvement

Why is NALCO’s performance improving now, and what underpins the optimism?

1. Operational momentum

The Q2 FY26 results give tangible proof of the turnaround gaining speed:

• Revenue up roughly 7–7.3% year-on-year in Q2.
• Net profit for Q2 surged ~35-37% YoY to ~₹1,430 crore.
• Margin expansion: EBITDA margin in Q2 rose to ~45% (vs ~38.7% in same period last year) according to one source.
• On the physical front: strong alumina and aluminium sales, record outputs in certain segments.

2. Cost structure becoming more competitive

A major structural strength: captive coal now meeting ~57% of requirement (per Equitymaster). This gives NALCO a meaningful cost advantage on the alumina side.
Lower power & fuel cost as a percentage of net sales in Q2 (17.1% vs 20.2% YoY) reflects this benefit.

3. Growth pipeline visible; valuations yet to reflect it

While many PSU stocks get stuck in “status quo”, NALCO has a growth story ahead:

• Increase in volumes is expected once capacity expansions complete. Equitymaster highlights that NALCO is “caught at an interesting inflection point”.
• Because it is debt-free with strong cash, it can internally fund much of its expansion. (Thus reducing risk of dilution or leverage.)
• The market currently appears to focus on cyclical commodity risk (alumina / aluminium price swings) and perhaps ignores the structural improvement.

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Why the market is cautious

Despite the positives, there are clear risks which help explain why the valuation remains modest.

• A heavy dependence on commodity cycles. Even with cost advantage, earnings will move with global aluminium and alumina prices. Equitymaster cautions that near-term volume growth is capped and the business remains a “pure play” on commodity.
• Execution risk: The ramp-up of new capacity is delayed; until new volumes come online, growth that drives re-rating may remain limited.
• Sentiment challenge: Many PSUs are viewed as low-growth or legacy entities; investors hesitate to pay premium multiples until the turnaround is firmly visible.

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The valuation gap: Why it matters

Putting it together, the argument is: here is a large PSU, with strong return metrics (ROE ~32%), no debt, cost tailwinds, growth ahead—and still trading at a single-digit P/E (~7.8). For value-investors this signals a potential margin of safety plus upside if the growth story aligns.

From a broader perspective, when large PSUs tick the boxes of (a) capital efficiency, (b) cleaner balance sheet, (c) visible growth engine and (d) low multiples — they resemble “private-sector style” operating models, yet with public sector backing. That mismatch between operational strength and valuation can create opportunities.

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What to watch going forward

If you are monitoring this story, some key milestones to track:

• Growth in alumina and aluminium volumes: especially as new capacities come online and domestic & export demand strengthen.
• Commodity price trends: a sustained recovery in aluminium/alumina prices will boost margins; conversely, a sharp downward swing could squeeze earnings.
• Cost structure improvements: how much benefit is derived from captive coal & fuel; how much further margin expansion is possible.
• Execution of the next expansion phase: timelines, capex, incremental volume, and internal funding.
• Market re-rating: whether the low multiple gap begins to narrow once growth becomes more visible and the cyclical risk is perceived as less.

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Final thoughts

The Equitymaster piece rightly labels NALCO as “not just a cheap PSU” but “a structurally improving business caught at an interesting inflection point”.
If the growth engine kicks in as expected, and commodity conditions stabilise, then the market’s modest valuation may start to look overly conservative.

That said, being tied to commodity cycles and execution risk means it’s not risk-free. So while NALCO may merit a place on the watchlist, investors should enter with awareness of the triggers and risks.