The Surge in NALCO Share Price: Is There More Upside Ahead?

In the fast-paced world of financial markets, a single large-scale economic stimulus can reshape market sentiment. Recently, the metal industry has witnessed a massive rally, largely driven by significant economic developments in China. Chinese stocks, in particular, saw their most substantial single-day jump since 2008, all due to stimulus measures aimed at boosting the economy. The impact of this news extends far beyond China, positively affecting several sectors in India, including metals and chemicals. The slowdown in Chinese dumping activities is expected to create more opportunities for Indian companies to thrive. Among Indian metal stocks, National Aluminium Company (NALCO) has emerged as a standout performer, delivering over 25% gains in just one month and 15% in the past week alone.

This blog will explore the factors behind NALCO’s recent surge and what the future holds for this leading aluminium producer.

Why NALCO is on the Rise

1. Economic Stimulus from China

One of the primary drivers behind the surge in metal stocks, including NALCO, is China’s recent announcement of sweeping economic stimulus measures. As the world’s largest consumer of metals, any significant economic shift in China sends ripples across global markets, and this time is no different. Last Tuesday, the People’s Bank of China (PBoC) unveiled plans to boost liquidity and lower borrowing costs to combat the economic slowdown. By cutting the reserve requirement ratio (RRR) by 50 basis points, the central bank is enabling Chinese banks to lend more, injecting much-needed liquidity into the economy.

This move is anticipated to stimulate global metal demand, as China’s construction, manufacturing, and property sectors will require more raw materials. Given that China is the largest consumer of metals like aluminium, copper, and steel, the stimulus has reignited investor interest in metal stocks worldwide, including in India. Lower interest rates on mortgages and support for the real estate market are expected to fuel demand for metals, which, in turn, is bolstering investor confidence in Indian metal companies such as NALCO.

Moreover, the PBoC is expected to further reduce its seven-day repo rate and the medium-term lending facility rate. Though the timeline for these reductions remains uncertain, the market is already pricing in the positive effects of these measures. Coupled with the U.S. Federal Reserve’s recent rate cut, China’s moves allow for greater flexibility in easing its monetary policy without putting excessive downward pressure on its currency, the yuan. Analysts predict that these efforts will stabilize and possibly even boost metal demand, which has led to a rise in stock prices for major companies like Vedanta, Tata Steel, and NALCO.

2. Rising Aluminium Prices

Another critical factor behind NALCO’s recent performance is the increase in aluminium prices. Although aluminium prices have come down from their record high of US$3,900 per tonne, they have seen a notable increase in the past month. This rise is largely attributed to growing demand from China, which appears to be turning the corner after a prolonged period of sluggish growth.

China’s economic recovery is crucial to the global aluminium market, as it is the largest consumer of the metal. In addition to the rebound in Chinese demand, aluminium is also becoming more essential across industries such as automotive, power, and construction. Given its diverse applications and its vital role in infrastructure, aluminium demand is expected to remain strong, particularly as economies in Europe and the United States show signs of recovery.

The combination of increasing demand, rising prices, and NALCO’s unique positioning as one of India’s largest aluminium producers has contributed to its stellar performance on the stock market.

3. Brokerage Upgrade

In addition to external economic factors, NALCO’s share price has been bolstered by a recent upgrade from a well-known brokerage firm. The brokerage firm raised its rating on NALCO, citing the company’s attractive risk-reward profile. According to analysts, NALCO is well-positioned to capitalize on the ongoing supply tightness in the alumina market.

As a pure-play aluminium company, NALCO enjoys the highest leverage to rising aluminium prices, making it a prime beneficiary of current market conditions. Additionally, the increase in alumina prices alumina being a critical raw material in aluminium production further supports the company’s profitability. NALCO not only produces aluminium but also sells alumina, effectively doubling its earnings potential with every US$400 per tonne increase in aluminium prices.

What’s Next for NALCO?

While the recent surge in metal stocks has been impressive, analysts are approaching the future with cautious optimism. NALCO’s performance is being buoyed by favorable global economic conditions, including aggressive rate cuts by the U.S. Federal Reserve and China’s stimulus measures. These macroeconomic factors have provided a supportive environment for metal companies, but how sustainable is this rally?

Looking ahead, NALCO and other metal companies stand to benefit from robust domestic fundamentals. India’s ongoing infrastructure development and industrial activities are expected to fuel demand for metals, ensuring strong growth prospects for companies in the sector. Additionally, falling input costs, such as lower energy and raw material prices, should provide further support for profitability. Steel companies, in particular, are likely to capitalize on domestic price premiums, making the industry an attractive investment opportunity.

One of the most exciting developments for NALCO is its entry into the lithium mining sector. As part of India’s push to establish a domestic lithium value chain, NALCO has ventured into lithium mining and battery manufacturing. By leveraging its existing industrial infrastructure and expertise in metallurgy, NALCO is positioning itself as a major player in the growing lithium market. This vertical integration into the lithium value chain could significantly enhance the company’s growth potential in the coming years.

Financial Overview of NALCO

NALCO has experienced a period of strong financial performance, thanks to rising aluminium prices and favorable market conditions. The company’s revenue and net profit have grown steadily in recent years. Here’s a snapshot of NALCO’s financial performance over the past five fiscal years:

• Net Sales: From Rs 84,718 million in FY20 to Rs 142,569 million in FY23, reflecting a significant increase.

• Operating Profit: Increased from Rs 7,618 million in FY20 to Rs 31,236 million in FY24.

• Net Profit: NALCO’s net profit surged from Rs 1,362 million in FY20 to Rs 19,885 million in FY24.

• Return on Equity (ROE): Improved from 1.3% in FY20 to 14.5% in FY24.

• Debt: The company has maintained a zero-debt status, ensuring strong financial health.

• Dividend: NALCO has consistently rewarded shareholders with dividends, offering a yield of 1.3% in FY24.

NALCO’s financial strength, combined with its debt-free balance sheet and consistent dividend payouts, makes it an attractive investment for both institutional and retail investors.

Recent Stock Performance

In terms of recent market performance, NALCO’s stock has gained significant traction. Over the past five days, the stock price has risen by 14%, and year-to-date, the stock is up by a staggering 65%. NALCO reached a 52-week high of Rs 227 on October 1, 2024, and its 52-week low was Rs 89, touched on October 26, 2023. Over the past year, NALCO’s stock price has increased by 132%, reflecting strong market confidence in the company’s growth prospects.

In summary, NALCO’s rise can be attributed to a combination of external economic factors, rising aluminium prices, and the company’s strategic positioning in the market. China’s stimulus measures have provided a much-needed boost to global metal demand, while NALCO’s solid financials and foray into lithium mining offer exciting growth opportunities. Looking ahead, NALCO is well-positioned to benefit from strong domestic and global demand for metals, making it a key player in India’s industrial growth trajectory.