Getty ImagesThis low-cost aluminium producer is the best bet at a time when aluminium prices have fallen.

Due to several reasons, including government interference in their managements, most stock market experts avoid PSU stocks. However, National Aluminium (Nalco) is an exception because this Navaratna company has several unique advantages:

First, is its integrated business model. Nalco has a presence in all the three stages of aluminium production—bauxite, alumina and aluminium. Due to its access to high quality bauxite and coal mines, its cost of production is one of the lowest in the world. Nalco’s 1,200-MW captive power plant is another factor contributing to its low production cost.

Though power and fuel costs went up in the second quarter of 2018-19 due to the coal shortage from captive mines, things are expected to get better soon. Ground work on mining at Utkal-D coal block in Odisha is going on and commercial mining is expected to start by the end of 2019. This will help Nalco sustain its low cost production for a long time. With its caustic soda joint venture commencing operations in 2019-20, Nalco will be assured a supply of around 50,000MT of this key raw material.

Second, the recent correction in the counter, triggered mostly by the fall in international aluminium spot prices—at 22-month low—has brought down its valuations to attractive levels. Nalco is one of the few metal companies that can boast of free cash flow (FCF) and is expected to generate around Rs 1,200 crore of FCF in 2018-19. Despite its increased capex, pidend payout and recent Rs 500-crore share buy back, its cash pile is estimated to be about Rs 2, 900 crore—around 28% of its market-cap. This means the company is likely to be liberal with pidend and buy back shares in the future as well.

Third, analysts don’t expect a cut in international aluminium prices from their current levels because the price has started reaching break-even levels for several companies. For instance, Chinese companies that deal in domestic alumina have started reporting operating losses, and this is why, in addition to environmental issues, China has seen a big cut in aluminium production.

Chinese producers have cut production by around 3.2 million tonne in 2018, mostly after the recent crash in aluminium prices and another 0.8 million tonne in 2019—combined this will be a cut of around 10% of total Chinese capacity. National Aluminium is not deterred by price fall and is continuing with capacity expansion. In fact its fifth stream in the existing alumina refinery at Damanjodi is expected to be completed by 2020-21.

Analysts’ views

Buy: 10

Selection Methodology

We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts.