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FY21 silver volume is likely to exceed the guidance…

Hindustan Zinc (HZL) reported steady set of performance for Q3FY21, wherein topline and EBITDA came in marginally higher than our estimate, while PAT came broadly in line with our estimates. For the quarter, zinc sales volumes came in at ~182000 tonnes (up 6% YoY, 1% QoQ, marginally higher than our estimate: 180048 tonnes), lead sales volume came in at ~53000 tonnes (up 26% YoY, however down by 7% QoQ, in line with our estimate: 53188 tonnes) while silver sales volume came in at ~183000 kg (up 19% YoY, however down 10% QoQ, higher than our estimate: 175000 kg). EBITDA came in at | 3269 crore (up 43% YoY, 11% QoQ), marginally higher than our estimate of | 3128 crore. EBITDA margin came in at 54.2%, broadly in line with our estimate of 54.0% (EBITDA margin of 52.2% in Q2FY21 and 49.0% in Q3FY20). HZL’s Zinc cost of production (CoP) before royalty during quarter stood at US $946/tonne per tonne, lower by 12%YoY & higher by 3%QoQ. The ensuing PAT for Q3FY21 stood at | 2200 crore (up 36% QoQ but down 13% YoY), in line with our estimate of | 2173 crore.

Healthy reserve base provide earnings visibility over long term

HZL has a huge reserve base, which provides strong earnings visibility. During the year, total ore reserves increased from 92.6 million tonnes (MT) at the end of FY19 to 114.7 MT at the end of FY20, while mineral resources totalled 288.3 MT. Total R&R was unchanged at 403 MT from a year ago as ore consumed during the year was replenished. Total contained metal in ore reserves was 7.95 MT of zinc, 2.07 MT of lead and 256.2 million ounces of silver. The mineral resources contain 15.87 MT of zinc, 5.93 MT of lead and 641.8 million ounces of silver. At current mining rates, the R&R underpins metal production for more than 25 years.

Volume performance healthy during 9MFY21 …

Earlier, HZL had guided for mined metal and finished metal production of 925-950 KT each and saleable silver production of 650 tonnes. It had also guided for zinc CoP to remain below US$ 1000/tonne. On the back of healthy performance during 9MFY21, HZL is on track to achieve its mined metal and refined metal volume guidance. It is also likely to exceed its guidance on silver production and cost of production for FY21.

Valuation & Outlook

Over the last few months, there has a healthy traction witnessed in Zinc prices on the LME. During Q3FY21, average Zinc prices on the LME stood at US$ 2628/tonne (up 10% YoY 12% QoQ). The uptick in Zinc prices augurs well for HZL. We have introduced FY23E estimates and roll over our valuations to FY23E. Going forward, we have modelled EBITDA margin of 51.5% in FY21E, 53.9% in FY22E and 54.8% in FY23E. We have valued the stock at 6x FY23E EV/EBITDA and arrived at a target price of | 290, assigning a HOLD recommendation on the stock (earlier target price of |230).

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