Buy Hindustan Zinc Ltd For Target Rs. 565 By Yes Securities Ltd
Growth prospects blessed with a ‘silver’ lining. Initiate with BUY
We initiate coverage on Hindustan Zinc Ltd. (“HZL” or “the company”) with a BUY rating. Our rating on HZL is built on the following conviction- (1) Refined metal volumes to reach 1,200 kt by FY27E, (2) Silver business to be a focal point of attraction going forward, (3) Expansion plans to focus on new reserves and resources with a lowdebt profile Being a net-debt free company allows, and (4) Cost-saving initiatives and increased VAPs are expected to accrue benefits over the long-term.
Refined metal volumes to reach 1,200 kt by FY27E
Refined metal volumes are expected to reach c.1,200 kt by FY27E courtesy of a new 160 ktpa roaster at Debari smelting complex, fumers ramping up for additional production clubbed with debottlenecking initiatives taking place. Refined metal volumes are expected to grow at 5.0% CAGR for FY24-27E period. Revenues from Zinc and Lead are expected to grow at a 11.6% CAGR during the same period with a stable pricing environment expected which is expected to improve by a CAGR of 5.8%.
Silver business to be a focal point of attraction going forward
HZL’s silver business has become a key earnings contributor and is expected to remain crucial. With global silver supply facing challenges and demand rising from industries especially PV cell manufacturing, prices are likely to stay firm. HZL aims to achieve 800 tons per annum, with output expected to reach 776 tons by FY27E, reflecting a 1.3% CAGR for FY24-27E. Silver revenues are projected to grow at 8% CAGR, with EBIT contribution rising at 7.7% CAGR during the same period. The business, benefiting from high margins, is poised to sustain its profitability growth and would be an attractive component of HZL’s earnings.
Expansion plans to focus on new reserves and resources with a low-debt profile
HZL’s target of becoming a 2,000+ ktpa refined metal producer depends on its mining capacity expansion. The company operates 5 mines in Rajasthan, with a new one (Bamnia Kalan) set to contribute from FY28E onwards. As of March 2024, ore reserves stand at 175.1 million tonnes, making HZL the second-largest zinc R&R holder globally. Over the past decade, R&R grew from 365 mt to 456.3 mt, with strong resource-toreserve conversion rates of 90%+. With 281 mt of measured resources, HZL has over 25 years of mining potential at current production levels. We see HZL to focus strongly on adding reserves to its vast mining portfolio and grow steadily with retaining current mining leases and enhancing exploration activities.
Cost-saving initiatives and increased VAPs are expected to accrue benefits over the long-term
HZL is focused on cost optimization, targeting a sustainable cost structure of $1,000– 1,100/t, with FY25E Zinc CoP guidance of $1,050–1,100/t supported by lower eauction prices, improved ore grades, and increased renewable energy use. Renewable power, currently 15% of total consumption, is set to rise to ~70% by FY27E, driving cost savings. HZL is enhancing its value-added product mix with a 30 ktpa zinc alloy facility and plans a 510 ktpa fertilizer plant by FY26E to better utilize sulphuric acid. The fertilizer project is expected to generate Rs4,500–5,000 million EBITDA at full utilization levels. These cost saving measures and an added focus on VAP’s will have a positive impact on the company’s topline and the margin profile.
We value HZL at 11x FY27E EV/EBITDA to arrive at our target price of Rs565 /sh.
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