Pros and Cons of Investing in NALCO

The stock of Aluminium major NALCO was in the news today as Sanjay Lohia took over as the company's new CMD.

However, the stock has been in the news for quite some time as its price has increased sharply over the past one year.

This has been largely due to good operational performance by the company.

But what about the future? Should investors consider the stock now?

In this editorial, we will consider the pros and cons of investing in the stock of NALCO.

Pros

#1 Strong Operational Performance

Incorporated in 1981, National Aluminium Company, abbreviated as NALCO, is a schedule A Navratna CPSE. It's present in mining, metals, and power. It's under the ownership of the ministry of mines, government of India which has a 51.28% stake.

It's the country's largest integrated bauxite-alumina-aluminium-power complex, with bauxite mining, alumina refining, aluminium smelting, and casting.

The company has also commissioned more than 198 MW of wind power plants, with another 50 MW on the way, making it one of the largest producers of renewable energy among PSUs.

It set a record of the highest-ever production and sales of Aluminium and Bauxite in FY24.

Here are some of the operational highlights of FY24...

• Highest-ever cast metal production of 463,428 metric tonnes.
• Highest-ever metal sale of 470,108 metric tonnes.
• Highest ever bauxite excavation of 7,600,230 metric tonnes.
• Operationalised its Utkal D coal block and produced 2 million tonnes of coal.
• Achieved 101.2% capacity utilisation at its alumina refinery.

#2 Good Financials

The company has done well over the last few years in terms of financial performance in spite of a muted topline.

In FY24 the company's net profit was up 76.3% to Rs 19.9 billion (bn) while cash flow from operations nearly tripled to Rs 27.2 bn.

The company has no long term debt.

The return on equity (ROE) improved to 13.8% in FY24, from 10.9% in FY24. The return on capital employed (ROCE) improved to 19.0% in FY24, from 14.2% in FY23.

The company is doing quite well on the fundamentals.

#3 Lithium Mining

In a significant move towards ensuring the nation's critical mineral security, NALCO, through its leading partnership in KABIL, is embarking on a pioneering lithium exploration and mining project in Argentina.

Argentina is part of the "Lithium Triangle," which also includes Chile and Bolivia. This region boasts more than half of the world's total lithium resources.

Argentina holds the distinction of having the second-largest lithium resources, the third-largest lithium reserves, and the fourth-largest lithium production in the world.

KABIL (Khanij Bidesh India Limited) and CAMYEN have entered into a landmark agreement to begin the exploration and development of five lithium blocks in Argentina.

This strategic initiative not only strengthens bilateral ties but also ensures a resilient and diversified supply chain for critical and strategic minerals essential for various industries.

KABIL, a joint venture between NALCO, Mineral Exploration Corporation Ltd. (MECL), and Hindustan Copper Ltd. (HCL), was established to identify, acquire, develop, and process strategic minerals overseas for use in India.

KABIL will spearhead such international agreements, including potential partnerships with governments in other countries.

Beyond Argentina, KABIL is exploring lithium acquisition opportunities across other Latin American countries like Chile and Brazil. The venture is also considering alternative structures such as partnerships, long-term leasing of mines or lithium blocks, and direct investments in these mines.

Additionally, KABIL has entered into Memorandums of Understanding (MoUs) in Australia for the exploration of two lithium blocks and three cobalt blocks.

As a leading partner in KABIL, NALCO stands to benefit significantly from these strategic initiatives, furthering its goal of contributing to an 'Aatmanirbhar' Bharat and strengthening its position in the global minerals market.

Investors believe NALCO will be a prime beneficiary of India's lithium mining megatrend. NALCO's foray into lithium mining and battery manufacturing leverages their extensive industrial infrastructure and metallurgical expertise.

This vertical integration positions the company as a major player in the entire lithium value chain, from resource extraction to finished battery production.

Cons

#1 Muted Topline

Revenue growth is the first thing investors look at when considering a stock, especially for the long term. A steadily rising topline is a prerequisite for many fundamentals-focused investors.

Here's NALCO is clearly lacking.

In FY24, the company's revenue fell 7.8% over FY23. In fact, FY23's revenue was flat compared to FY22.

If we go back further, FY22 was a good year for the company with a 59% annual revenue growth. However, the previous two years were once again disappointing. Revenue fell in FY20 by 26% and in FY21, it grew by a muted 6%.

Not all of this is the company's fault. Aluminium prices are decided by the global commodity market.

But this could be a drag on the stock if prices don't cooperate in the long term.

#2 Possibility of Demands Made by the Government of PSUs

This risk is not restricted to NALCO.

In the past various Indian governments have made demands of PSUs to implement strategies that are not core to the business.

Also, demands have been made for excessive dividends and questionable capital allocation.

This is not too much of a problem for NALCO today but the future is uncertain in this regard.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...