NALCO earnings hold firm as alumina expansion faces softer LME and cost pressure

Investment View and Valuation

Motilal Oswal Financial Services describes NALCO’s Q1 FY27 earnings as broadly in line with expectations, supported by favourable aluminium prices. However, softer London Metal Exchange (LME) prices and cost inflation are near-term headwinds. The broker reiterates its Neutral rating and Rs 380 target price, compared with the current market price of Rs 369.

NALCO remains fundamentally strong because of its zero-debt position, net cash balance, favourable aluminium pricing environment and robust Indian aluminium demand outlook. Near-term upside is nevertheless constrained by limited production headroom, geopolitical tensions, execution challenges and regulatory risks.

Motilal Oswal has retained its FY27E and FY28E estimates. The target price is based on 6.5 times FY28E EV/EBITDA, using FY28E EBITDA of Rs 8,288 crore and adding the projected cash surplus.

Q1 FY27 Financial Performance

NALCO reported consolidated Q1 FY27 revenue of Rs 5,302 crore, up 39 per cent year on year and 6 per cent quarter on quarter, broadly in line with Motilal Oswal’s estimate. Consolidated EBITDA increased 81 per cent year on year and 15 per cent quarter on quarter to Rs 2,708 crore, also in line with estimates.

EBITDA margin expanded to 51.1 per cent from 46.9 per cent in Q4 FY26 and 39.2 per cent in Q1 FY26. Adjusted profit after tax rose 91 per cent year on year and 16 per cent quarter on quarter to Rs 2,002 crore, driven by strong operating performance.

Aluminium Segment Performs Strongly

The aluminium segment generated revenue of Rs 4,200 crore, up 8 per cent year on year and quarter on quarter. Segment EBIT increased 159 per cent year on year and 23 per cent quarter on quarter to Rs 2,300 crore, as higher net sales realisation offset inflation in input costs.

Aluminium metal production was flat at 116 kilotonnes, while sales volume was 113 kilotonnes, flat year on year but down 8 per cent quarter on quarter. Aluminium average selling price was US$4,017 per tonne, representing a 12.5 per cent premium to average Q1 LME. It increased 43 per cent year on year and 15 per cent quarter on quarter.

Chemical and Alumina Business Under Pressure

The chemical or alumina business faced weaker pricing. Revenue was Rs 1,570 crore, down 4 per cent year on year and flat quarter on quarter. EBIT declined 46 per cent year on year and 31 per cent quarter on quarter to Rs 270 crore because of muted net sales realisation and cost inflation.

Alumina hydrate production was steady at 578 kilotonnes, while sales increased 14 per cent year on year to 347 kilotonnes. Alumina hydrate realisation fell 20 per cent year on year and 5 per cent quarter on quarter to US$336 per tonne as global alumina prices corrected.

Alumina Expansion and Production Outlook

Management retained FY27 guidance of approximately 2.5 million tonnes of alumina production and approximately 1.6 million tonnes of alumina sales. The one million tonne per annum fifth-stream alumina refinery is expected to begin commercial production during November to December 2026 and reach full capacity in FY28.

The refinery should raise alumina production capacity to 3.2 million tonnes per annum and increase surplus alumina available for external sales. Management expects Q2 FY27 alumina net sales realisation of approximately US$370 per tonne, compared with about US$323 per tonne in Q1 FY27, supported by spot-price strength and higher bauxite prices.

Cost Inflation and Aluminium Price Outlook

Cost pressure remains material. Aluminium cost of production increased to approximately Rs 1,70,000 per tonne in Q1 FY27 from about Rs 1,57,000 per tonne in FY26, due to higher caustic soda, CPP coal, HFO and aluminium fluoride costs. Management expects Q2 FY27 aluminium cost of production to remain at approximately Rs 1,70,000 to Rs 1,72,000 per tonne.

LME aluminium prices corrected to about US$3,200 per tonne from US$3,500 to US$3,700 per tonne during Q1 FY27. Management expects prices of US$3,000 to US$3,200 per tonne over the remainder of FY27. Motilal Oswal expects this price correction, in the absence of volume growth, to limit growth in the next quarter.

Capacity Expansion and Key Risks

NALCO is pursuing a 0.5 million tonne aluminium smelter and an associated 1,080 MW captive power project, with commissioning targeted by December 2030 or FY31. Total smelter and power expansion capital expenditure is estimated at Rs 24,000 crore to Rs 25,000 crore.

The expansion provides long-term capacity growth but introduces execution and cost-escalation risks. Along with softer LME prices, limited production headroom, geopolitical tensions and regulatory risks remain important constraints on the near-term outlook.