Hindustan Zinc - Valuation support dims - ICICI Securities

Hindustan Zinc (HZL) has reported an in-line Q3FY21 performance. What stood out though is management confidence in i) FY22E volume ramp up to reach closer to 1.2mtpa mined metal production and ii) ability to reign in cost of production (CoP) despite commodity headwinds and incrementally higher developmental expenses. HZL has reported lowest-ever CoP since its journey to underground mine development began, that too inflated by US$20/te of one-off employee expenses. We incorporate the guided strength of volumes and a lower CoP trajectory leading to FY21/22/23E earnings increase of 5/12/9%, respectively. We downgrade the stock to REDUCE given the rich valuations with a revised target price of Rs257/share (Rs237/share earlier).

- In-line operational performance. Zinc sales volumes came in at ~182,000te (up 6% YoY, 1% QoQ, marginally higher than our estimate of 180,000te), lead sales volume came in at ~53,000 tonnes (up 26% YoY, however, down by 7% QoQ, in-line with our estimate), while silver sales volume came in at ~183000 kg (up 19% YoY, however, down 10% QoQ,), in-line with our estimate. Mined metal production was up 4% YoY, partially impaired by lower grade. Integrated production came in at 235kte up 7% YoY, with zinc at 182kte and lead at 52kte. Silver production has increased 23% YoY due to higher lead production, offset by lower grade in SK mine.

- Fumer commissioning delayed, should see April, '21 commissioning. Coronavirus restrictions, visa restrictions for foreign contractors, led to a delay in commissioning of fumer plant at Chanderiya mine and the company is seeking an alternative solution. HZL has received environmental clearances for expansion of Zawar mines to 4.8mnte from 4mnte and expansion of Chanderiya zinc smelter to 0.5mtpa. Backfill plant commissioning at two of HZL's mines will help in better mine planning. Mine development rate in Q3FY21 has been 10km/month, which management expects to ramp up to 14km/month as the journey towards 1.35mtpa of mined metal is undertaken.

- Consistently lower CoP, meaningful ramp up in FY22E production guided for. HZL will likely exceed silver production guidance of 650te in FY21 and will also comfortably meet cost of production guidance of below US$1,000/te for FY21E; cost of production during Q3FY21 was $946/te (down 12% YoY but up 3% QoQ). US$20/te of one-time employee cost incidence increased CoP for Q3FY2. Management is comfortable in guiding for a sustained low trajectory in costs, despite incurring higher developmental expenditure. Hind Zinc is also confident of meeting its mined metal and finished metal production guidance of 925,000-950,000te for FY21E. Project capex will be between US$100m-$140m this year, while combined capex has been guided at US$330mn. Management expects to target 1.2mnte of runrate (MIC) in Q4FY21, and therefore, FY22E should see a significant increase in production.

Shares of HINDUSTAN ZINC LTD. was last trading in BSE at Rs.283.2 as compared to the previous close of Rs. 296.45. The total number of shares traded during the day was 283887 in over 10024 trades.

The stock hit an intraday high of Rs. 304 and intraday low of 282. The net turnover during the day was Rs. 82132414.

Source : Equity Bulls

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