Hindustan Zinc (HZL) continues to prepare for its eventual leap towards 1.2mtpa and then 1.35mtpa of mined metal production. While, FY22 was expected to witness rampup in production to 1.2mtpa, second wave of Covid outbreak in India seems to have postponed the same. Management continues to guide for a conservative 11.5% YoY mined metal production growth (mid-point). Similarly, silver production guidance has been maintained at 720te. Q1FY22 witnessed significant cost escalation (13% QoQ) because of higher coal and diesel prices. This along with lower than expected metal production led to 5% EBITDA miss. Project development (capital) is being continued at an impressive pace. We maintain REDUCE with a target of Rs280.
- Operational performance muted. Metal in concentrate (MIC) production was down 23% QoQ because of lower ore production and overall grades; integrated metal production at 236kte was down 8%YoY. Integrated lead/silver production suffered more down 21% QoQ while integrated Zinc production dropped only 4% QoQ. Cost of production increased 13% QoQ to US$1070/te primarily due to surge in commodity prices (mainly coal and diesel).
- FY22E production/operational guidance maintained. Mined metal and refined metal production is expected to be at ~ 1025-1050kte. This compares to metal production of 930kte for FY21. Better lead production growth, up 18%YoY in FY21, and better silver grades at SK mine allowed 16% YoY growth in silver production to 706te in FY21. Management has guided for 720te of silver production in FY22. Cost guidance has been maintained at < US$1,000/te.
- Preparatory work for three major expansion projects underway. Management highlighted ~ US$100mn project capex for FY22. Preparations for engineering design for the Gujarat Smelter and the Fertiliser plant are underway. On completion of the same, the proposal will be presented to the board. Preparatory work is also underway to expand integrated smelting from 1.2 to 1.35mtpa. At current mining rate reserves and resources underpins metal production for more than 25 years. Expansion of mining plan would require EC approval. Proposal for integrated expansion will be presented to the Board by Q2/Q3FY22 and the majority of the capex spend will happen in FY23/24E. Fumer plant (at Chanderiya) commissioning has been delayed due to movement restriction of foreign consultants/contractors and is now expected to commission by Nov, '21.
- Maintain REDUCE. We maintain REDUCE on HZL, with a target of Rs 280/share. Gross and net cash equivalents were Rs239bn and Rs172bn (Rs223bn and Rs151bn QoQ). Debt will be repaid as per maturity, with Rs10bn due for repayment in FY22E.
Valuation methodology and key risks
Maintain REDUCE with a target price of Rs280/share. We value HZL at 6x FY23E EV/E (implied FY23E P/B of 3.1x). Current valuations are quite rich given that at spot prices most zinc miners globally are making money and at spot prices RoE profile of Hind Zinc is ~30%.
Key upside risks are commodity and silver prices. We have captured a lower-than-spot scenario in our estimates. Also higher than expected volume ramp up, better than expected cost performance despite an environment of commodity inflation are key upside risks to earnings. Any directional clarity towards government stake sale and purchase of the same by Vedanta can lead to higher valuation expectation for minority investors as well.
Key downside risks are i) lower than expected zinc and lead prices, ii) lower volumes and iii) higher costs.
Shares of HINDUSTAN ZINC LTD. was last trading in BSE at Rs. 329.05 as compared to the previous close of Rs. 327. The total number of shares traded during the day was 108512 in over 4883 trades.
The stock hit an intraday high of Rs. 335.85 and intraday low of 326. The net turnover during the day was Rs. 36045982.