Undervalued Giant: Why this PSU’s low price-to-earnings ratio and high ROE demand investors’ attention

November 15, 2025

There is something fascinating about the way markets are treating PSU stock.

They love them in good times, abandon them in uncertain times, and rediscover them only after a major rally has already taken place. A classic case of ‘too late, too often’.

But every few years, one PSU rises above the noise and quietly rewrites its own story. At the moment it is a metal giant that resembles it in every respect: stability, capital efficiency, a strong balance sheet and enviably low valuations.

That stock is NALCO.

The company just delivered its best-ever performance in the second quarter of 2026 and in the first half of 2026, creating a valuation gap that’s hard to justify. Despite higher volumes, expanding margins and a large investment cycle set to unfold from FY27 onwards, the market is still pricing NALCO at single-digit earnings multiples. Such levels are generally reserved for stressed lenders, rather than a globally competitive alumina producer.

The company’s standalone ROE in FY25 was 32.3%. It has no debt, has nearly Rs 80 billion in cash (as of September 2025) and can fully fund its expansion pipeline. And yet the shares trade at just 7.8 times earnings.

However, over the past year the share price lost momentum as alumina and aluminum prices cooled from their peaks, driving down sentiment in the broader metals basket. Q1 didn’t help either. Softer realizations, near-zero metal exports and the monsoon-induced dip in domestic aluminum demand made the quarter look weak. Operating profit also fell because costs were not in line with prices.

But none of this indicated a structural problem. It was just the commodity cycle at work. The kind of short-term volatility that longtime NALCO watchers are familiar with.

That is why the sharp recovery since then has been so striking.

A turnaround hidden in plain sight

Q2 made the shift visible.

Sales grew by 7% year-on-year. But the real momentum was in volumes, as alumina sales rose 39% to 396 kt. This was driven by alumina exports, which rose 33%, and domestic alumina exports, which were three times higher. In addition, the segmental margins expanded. Energy and fuel costs declined as captive coal production increased, making the second quarter one of the strongest quarters in NALCO history.

NALCO – Financial Performance Q2FY26

Source: company reportsA key part of this revival lies in the company’s changing cost structure. Captive coal is now expected to meet almost 57% of demand, providing NALCO with a structural cost advantage. This alone has helped the brand move significantly down the alumina cost curve.

The downside is that volume growth remains limited in the short term. Execution delays have prevented the expansion of new capacity, and until these expansions get underway, NALCO remains a pure play on alumina and aluminum prices, a business whose profits continue to move with global commodity cycles.

That is exactly why the next phase of expansion is so important.

The Expansion No one prices correctly

Two upgrades determine the next stage.

First, the 1 million tonne per annum (mtpa) alumina refinery expansion, now 80% complete, will come on stream. This increases refining capacity from 2.1 million tonnes per annum to 3.1 million tonnes per annum, adding approximately five million tonnes of alumina in FY27.

Secondly, the 0.5 million tonnes per year aluminum smelter, supported by its own 1,080 MW (megawatt) power plant. The DPR work is ongoing and commissioning is planned for 2030. This marks the start of a new multi-year scale-up of metal capacity.

Together, these projects represent nearly Rs 300 billion (billion) in capital investments. NALCO will raise some debt to finance the smelter and power plant. But management suggests the balance sheet remains strong enough to avoid heavy debt, backed by nearly Rs 80 billion in cash and robust annual cash flows.

A cost advantage that the market underestimates

NALCO’s moat is its price. Even with spot alumina prices hovering around $320-$340 per tonne, profitability is maintained. This is thanks to lower energy costs from indigenous coal and steady efficiency gains at the refinery. Every ton of domestic coal directly increases margins on both alumina and metal.

Valuation: A classic mispricing

For a company that delivers 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 share is at 4.5x. The market typically reserves these types of levels for companies with balance sheet stress or declining industry relevance, and neither applies here.

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

What the market seems to be missing is that NALCO’s earnings profile is slowly shifting from cyclical to structurally stronger. Volatility has not disappeared, but the bottom has risen.

Is a revaluation on the horizon?

Revaluations are rare when the numbers are bad. They happen when:

• the worst is behind us,
• the cost curve moves decisively lower,
• capacity comes online, and
• Cash generation remains strong.


NALCO checks all these boxes. Volatility in the first quarter of 2026 is behind it, the second and first half of the year show an improving economy and the next 24-36 months show a clear path to higher volumes. With domestic coal doing the heavy lifting of costs and refinery expansion just around the corner, the profit base is expected to increase significantly once the cycle turns.

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

Conclusion

NALCO is not just a cheap PSU.

It is a structurally improving company that is at an interesting inflection point. Costs fall, cash flows rise and large parts of the capex cycle can be financed internally. Yes, near-term volumes are limited and the company remains subject to alumina and aluminum price fluctuations.

But with the expansion phase underway, the combination of a stronger cost base, higher future volumes and a persistently low valuation creates a situation that long-term investors may want to pay more attention to.

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