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Revenue in line; power and input costs drag PAT

HZ to acquire Zinc International assets for USD2.9b

* Hindustan Zinc’s (HZ) revenue at INR79b (down 2% YoY and 6% QoQ) in 3QFY23 was in line with our estimate. Revenue was marginally lower YoY, on the back of lower LME prices coupled with lower refined metal volumes.

* EBITDA at INR37b (down 15% YoY and 16% QoQ) was in line with our estimates. Power and fuel costs were at INR10b (up 43% YoY and 2% QoQ), driven by elevated coal prices and lower coal linkages in 3QFY23. EBITDA margin stood at 47% (lower by 580bp QoQ), on the back of higher input costs, partially offset by lower royalty expense.

* Cost of Production (CoP) for 3QFY23 stood at USD1,293/t, up 3% QoQ and 13% YoY (up 24% YoY and 6% QoQ in INR terms) on the back of higher input costs and coal prices and lower coal linkages.

* PAT at INR22b (down 20% YoY and QoQ) was below our estimate of INR24b. It was adversely impacted by weak operating performance and higher depreciation.

* Refined zinc sales was 210kt (down 1% YoY and up 11% QoQ), refined lead sales stood at 46kt (down 2% YoY and 19% QoQ), and silver sales was 161t (down 7% YoY and 17% QoQ). Decline in lead and silver volume was due to a planned shutdown at the Dariba plant and lower feed grade at SK Mine.

* 9MFY23 Revenue/EBITDA/PAT stood at INR 256b/133b/79b, up 24%/18%/18% YoY, respectively, driven by 8% higher Zinc sales volume, 10% higher lead sales volume, higher zinc LME prices, favorable exchange rates, and gains from strategic hedging. This was partially offset by a 6.5%/14.2% YoY decline in Lead/Silver prices. Zinc sales volume was 605kt (up 8% YoY), lead volumes was 157kt (up 10% YoY), and silver sales volume stood at 532tonnes (up 10% YoY).

* HZ announced the acquisition of Zinc International business for a total consideration of USD2.9b, which will give HZ access to a resource base of 35mt with over 30 years of mine life. The acquisition will help HZ ramp up from 1.2mt capacity to 2mt+ capacity, while giving access to countries in Africa, Europe, and North America

Guidance on volume and CoP retained.

* FY23 guidance:

- Mined metal production to be maintained over 1mt

- Gradually increase to 1.2mt by FY24

- Post strategic acquisition of Zinc International business, the company plans to gradually ramp up to over 2mt in the next four years

* The management maintained its cost guidance at USD1,225-1,275/t after an increase of USD34/t QoQ.

* HZ plans to be a net zero company by 2050 and in order to further strengthen this vision, the company has an approved investment of INR4.4b for setting up 250mw renewable energy plant. This will take HZ requirement to over 50% via RE source.

Valuation and view

* The management reiterated its volume guidance for FY23E of over 1mt (in line with our estimates) and a gradual ramp up to 1.2mt volume by FY24. Lower Zinc and Lead stock at warehouses should provide price support.

* The management has maintained guidance on CoP and expects it to range between USD1,225/t and USD1,275/t. Fuel costs is expected to reduce as stock of high cost imported coal has been utilized and HZ expects better coal linkages in 4QFY23.

* We have raised our FY24 estimates to incorporate the cost reduction benefits. At its current levels, HZ is trading at a rich valuation of 6.7x FY24 EV/EBITDA. We reiterate our neutral rating on the stock for a target price of INR350 (6x FY24 EV/EBITDA

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