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In-line earnings; potential headwinds in the form of softened LME and cost inflation

* NALCO (NACL)’s revenue was in line at INR53b (+39% YoY and +6% QoQ), mainly driven by favorable aluminum prices.

* Consol. EBITDA stood at INR27b (+81% YoY and +15% QoQ), in line with our estimate during the quarter. EBITDA margin stood at 51.1% in 1QFY27 against 46.9% in 4QFY26 and 39.2% in 1QFY26.

* Adj. PAT for the quarter stood in line with our est. at INR20b (+91% YoY and +16% QoQ), led by strong operating performance

Aluminum business

* Revenue from the aluminum business stood at INR42b, rising 8% YoY and 8% QoQ on account of favorable LME prices.

* EBIT for the vertical stood at INR23b, rising 159% YoY and 23% QoQ in 1QFY27, mainly supported by higher NSR offsetting cost inflation.

* Metal production stood at 116kt, flat YoY and QoQ, while sales volume was 113kt, flat YoY but down 8% QoQ during the quarter.

* ASP for aluminum was USD4,017/t at a 12.5% premium over the 1Q average LME, up 43% YoY/15% QoQ, supported by favorable LME prices.

Chemical (Alumina) business

* Revenue from the chemical business declined 4% YoY and remained flat QoQ at INR15.7b, mainly due to a correction in global alumina prices.

* EBIT came in at INR2.7b, down 46% YoY and 31% QoQ in 1QFY27, mainly due to cost inflation and muted NSR.

* Alumina hydrate production stood flat QoQ and YoY at 578kt, whereas the sales volume increased by 14% YoY and 1% QoQ to 347kt.

* ASP for alumina hydrate declined 20% YoY and 5% QoQ to USD336/t due to muted alumina prices, which have dipped to ~USD300/t from ~USD580/t over 12M.

Valuation and view

* NACL posted strong earnings in 1Q as anticipated, led by favorable aluminum prices, which helped offset the muted alumina price and cost inflation impact during the quarter. However, the recent decline in aluminum prices is expected to limit the growth in the coming quarter, in the absence of volume growth.

* The company has planned a next phase of growth, enhancing its capacity significantly in the long run. However, with the completion timeline of FY30, execution risks and cost escalations remain key concerns.

* Despite strong fundamentals, zero debt, favorable LME prices, and a robust demand outlook for aluminum in India, the near-term upside is capped by limited production headroom, geopolitical tension, execution challenges, and regulatory risks.

* At CMP, NACL trades at 6x on FY28E EV/EBITDA. We reiterate our Neutral rating on the stock with a TP of INR380, valuing the stock at 6.5x EV/EBITDA on FY28 estimates.

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