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In-line results; FY23 guidance maintained, albeit, challenging

No surprises in 1QFY23, again

* Hindustan Zinc (HZ)’s revenue was in line at INR94b (up 44% YoY and 7% QoQ) in 1QFY23, led by higher LME prices but partly offset by flat lead prices, repeating the trend of 4QFY22.

* EBITDA stood in line at INR51b (up 44% YoY and 4% QoQ). Power and fuel costs were at INR9b, up 15% QoQ, led by higher coal prices as FSA materialization was only 8% during the quarter and the company continued to import the balance coal from Australia and Indonesia.

* HZ’s PAT grew 46% YoY and 6% QoQ to INR31b, in line with our estimate of INR32b, as lower-than-estimated other income was offset by lower-thanestimated finance cost.

* The company used about 50% of the hedges for FY23 during 1QFY23 and the balance is likely to be exhausted in 2QFY23E. The effective realization for 2HFY23E is likely to be lower as zinc prices have also corrected sharply.

* Refined zinc sales declined 4% QoQ to 206kt while refined lead sales rose 10% QoQ to 54kt. Silver sales, at 177 tonnes, rose 9% QoQ.

Management reiterated its FY23 guidance despite steep cost pressure

* The management reiterated its FY23 production guidance: ? Mined metal production to be marginally higher at 1,050-1,075kt ? Silver production to be at 700-725t (v/s 647t in FY22)

* However, it also reiterated the cost of production (ex-royalty) guidance at USD1,125-1,175/t range (v/s USD1,264/t in 1QFY23). This implies about 13% lower cost of production for the remaining of FY23. Given the steep cost of coal, which has not reduced meaningfully in the near term, we believe the guidance on cost of production could be raised in the subsequent quarters

* Project capex guidance also remains constant at USD125-150m, along with maintenance capex guidance at USD350-400m.

* The management highlighted that it plans to reduce the cost of power structurally by replacing the coal/fossil-based power with renewable power. It is already looking at 200MW of renewable power by FY24E. We await further details of the company under which this 200MW renewable power will be set up along with the price and other terms of contract, as it is not being set up under HZ.

Valuation and view

* Notwithstanding severe cost pressure from coal, the management has not increased the cost guidance from USD1,125-1,150/t for FY23E, despite the CoP being at USD1,264/t in 1QFY23.

*  HZ expects more coal from the FSA as it has over 1mt due under the FSA commitments. We keenly await further update on this as the FSA coal from Coal India is the key to cost reduction at HZ.

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