Kotak Institutional Equities has upgraded its rating on National Aluminium Company Ltd. (NALCO), the state-run aluminium producer, from "Sell" to "Add." Along with this upgrade, Kotak has also significantly increased its price target for the stock by 47%—from ₹160 to ₹235. This revised target implies a potential upside of 12% from the stock's closing price on Monday.

The share price of NALCO has already seen substantial growth, rallying 22% over the last month alone, and is currently trading at ₹217.42, up 3.4% on the day. So far in 2024, the stock has soared by 60%, marking a strong performance amidst favourable market conditions.

In a research note, Kotak highlighted that NALCO is ideally positioned to benefit from the ongoing supply tightness in the alumina market, given its net long position in alumina production. Additionally, the current tailwinds in aluminium prices are expected to further support NALCO’s financial performance in the coming quarters.

One of the key cost-saving measures that NALCO has benefited from is the commissioning of its captive coal mine, which helped the company keep operational costs in check during the previous financial year. The note added that a further ramp-up of this captive mine will likely lead to continued cost reductions, further enhancing the company’s profitability.

Despite the slower-than-expected progress on NALCO’s 1 MTPA Alumina refinery expansion, Kotak believes that the project will start contributing to NALCO’s volumes in the second half of the financial year 2027. This delayed volume contribution, while a factor to monitor, does not significantly alter Kotak's positive outlook on the stock, especially in light of other strong growth drivers.

In light of these factors, Kotak has raised its EBITDA estimates for NALCO by 8%, 11%, and 17% for the financial years 2025, 2026, and 2027, respectively. These revisions are primarily based on more optimistic assumptions regarding commodity prices, particularly in the aluminium and alumina markets.

Additionally, Kotak has revised NALCO’s valuation multiple to 7 times EV/EBITDA from its previous multiple of 5.5 times, reflecting the brokerage’s increased confidence in the stock's future prospects. The current valuations, according to Kotak, present an attractive risk-reward ratio, making NALCO an appealing investment for both short-term and long-term investors.

Given the robust performance of NALCO’s shares in recent months, investors will likely keep a close eye on the company’s ability to deliver on cost-saving measures and continue benefiting from favourable market conditions. The broader aluminium and alumina markets remain strong, providing NALCO with an advantageous position for growth moving forward.

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