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Performs well….

Hindustan Zinc (HZL) reported a healthy Q4FY21 performance, primarily on account of higher-than-expected sales volume. For the quarter, zinc sales volumes came in at ~198000 tonnes (up 14% YoY, 9% QoQ, higher than our estimate: 191813 tonnes), lead sales volume came in at ~62000 tonnes (up 29% YoY, 17% QoQ, higher than our estimate: 54575 tonnes) while silver sales volume came in at ~203000 kg (up 41% YoY, 11% QoQ, higher than our estimate: 187500 kg). Topline came in at | 6947 crore (up 58% YoY, 15% QoQ), higher than our estimate of | 6435 crore.

EBITDA came in at | 3875 crore (up 97% YoY, 19% QoQ), higher than our estimate of | 3594 crore. EBITDA margin came in at 55.8%, in line with our estimate (EBITDA margin of 54.2% in Q3FY21, 44.7% in Q4FY20). HZL’s zinc cost of production (CoP) before royalty during quarter was at US$945/tonne per tonne (| 68969/tonne), down 5%YoY both in rupee, US dollar terms and flat QoQ (down 1% in rupee terms). Ensuing PAT for Q4FY21 was at | 2481 crore (up 13% QoQ, 85% YoY), higher than our estimate of | 2353 crore.

Healthy reserve base provides earnings visibility over long term

HZL has a huge reserve base, which provides strong earnings visibility. During the year, total ore reserves increased from 114.7 million tonnes (MT) at the end of FY20 to 150.3 MT at the end of FY21 while mineral resources totalled 297.6 MT. Total R&R increased to 448 MT as HZL replenished more than it consumed during the year. Total contained metal in ore reserves is 9.16 MT of zinc, 2.55 MT of lead and 295.5 million ounces of silver. The mineral resources contains 14.9 MT of zinc, 6.3 MT of lead and 618.7 million ounces of silver. At current mining rates, the R&R underpins metal production for more than 25 years.

Outlook for FY22…

Going ahead, HZL has guided that both mined metal and finished metal production in FY22E will be higher than FY21 and is expected to be ~1025- 1050 KT each. It has also guided that zinc CoP (before royalty) in FY22 will remain below US$1000/tonne. FY22E saleable silver production is expected to be higher than FY21 and is projected at ~720 tonnes. The project capex for FY22 is expected to be ~US$100 million.

Valuation & Outlook

Over the last few months, healthy traction was witnessed in zinc prices on the LME. The uptick in zinc prices augurs well for HZL. Going forward, we model EBITDA margin of 54.2% in FY22E and 55.2% in FY23E (FY21 EBITDA margin was at 51.6%). We value the stock at 7x FY23E EV/EBITDA (upward revised from 6x earlier) and arrive at a target price of | 340 (earlier target price of | 290), maintaining our HOLD rating on the stock.

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