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Robust domestic demand and focus on VAP to fuel growth

* Hindustan Zinc (HZL) is India’s largest and the world’s second largest integrated zinc producer and is one of the lowest cost producers of zinc globally.

* HZL is a 64.92% subsidiary of VEDL and 29.54% of its stake is held by government.

* It commands 80% market share in primary zinc market in India and operates the world’s largest UG zinc mine at Rampura Agucha along with mines at Sindesar Khurd, Rajpura Dariba, Zawar and Kayad. It has a total ore reserves of 173.5mt and R&R of 460.1mt containing 30.8mt of metal content (~6.6%).

* HZL has total mined metal capacity of 1.2mt and smelting capacity of 1.123mt and is further ramping up its UG mines to reach a mined metal capacity of 1.35mt and eventually 1.5mt.

* The company is all set to capture the growing domestic steel and automobile demand amid rapid expansion in infrastructure and construction, as well as improved standard of living and urbanization.

* As India inches towards the 300mt crude steel production target by FY30-31, the demand for galvanized steel is likely to outpace other metals. HZL has a strong focus on value added products (VAP). The share of VAP stands at ~20% of the total sales, which is expected to gradually rise to 24% by FY25.

* While HZL is well placed, the stock trades at 6.1x FY24E EV/EBITDA and appears to be fully discounting the benefits. We maintain our Neutral rating on the stock with a TP of INR300 (premised on 6x FY24E EV/EBITDA).

* Key risks – a) any weakness in steel or auto demand will hit the demand for zinc and lead; b) HZL has turned from being a cash rich company to having a net debt; any increase in borrowings would impact the margins adversely.

Focus on integrated capacity expansion and VAP

* HZL surpassed 1mt mined metal benchmark for the second consecutive year driven by higher ore production across mines.

* To leverage the growing global demand for zinc and lead, it is aiming to ramp up exploration to increase resources by 15mt ore in FY24 and another 40mt ore by FY25.

* Ramping up of UG mines will help in delivering 1.2mt of total mined metal capacity in the near term and 1.35mt of mined metal by FY25.

* To meet the future growth target, all the mines are undergoing a host of expansion and upgradation processes.

* In addition to mine expansion, HZL is also undertaking multiple capex such as setting up of beneficiation plant at Rajpura Dariba, Roaster at Debari and setting up of fumer that will help in improving metal recovery and reduce waste.

* The construction at Roaster and beneficiation plant is under advanced stage and is likely to commence production from end of 1QFY24.

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