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Outlook remains strong, but priced in Maintain Neutral

* Hindustan Zinc (HZ)’s 4QFY21 results were strong as EBITDA jumped 19% QoQ to INR38.8b on record-high refined metal sales of 260kt (+11% YoY). The Silver business remained strong with EBIT of INR12.2b (38% of total).

* We expect a 9% CAGR in HZ volumes over FY21–23E, which would drive a 19% EBITDA CAGR. However, we believe this growth is factored in the current valuation; therefore, we rate it Neutral.

EBITDA up 19% QoQ, led by higher volumes

* Revenue/EBITDA/PAT grew 15%/19%/13% QoQ to INR69.5b/INR38.8b/ INR24.8b, 10%/12%/2% above our estimate – driven by 11% higher refined metal volumes and higher LME pricing. The beat was led by better-thanexpected refined volumes of 260kt (est. 245kt) and silver volumes of 203t (est. 167t).

* During the quarter, the company achieved record-high mined metal volumes of 288kt (up 18% QoQ) and refined metal production of 256kt (up 9% QoQ).

* Sales volumes were strong across the business, with Zinc coming in at +9% YoY to 198kt, Lead at +17% YoY to 62kt, and Silver at +11% YoY to 203t.

* Reported CoP was up 2% QoQ to USD945/t (adjusted for a one-time employee payout amounting to ~USD20/t in 3QFY21).  Other income declined 34% QoQ to INR 2.9b due to lower yields in 4QFY21.

* Net cash balance stood at INR151.3b v/s INR110.0b at 3QFY21-end (INR216b at FY20-end).

* FY21 EBITDA/PAT stood at ~INR117b/INR80b (+33%/17% YoY). The increase in finance cost and higher tax rate of 24.5% (18.9% in FY20) led to slower PAT growth. FY21 OCF/FCF stood at INR106b/INR80.8b (+60%/171% YoY) on account of higher EBITDA and lower capex.

FY21 exit run-rate at 1.2mtpa, but volume guidance lowered

* The management highlighted that the zinc demand environment remains buoyant, driven by China. However, domestic zinc demand is impacted in Apr’21 by a surge in the number of COVID cases.

* The company achieved an exit run-rate of 1.2mtpa over FY21 (288kt in 4QFY21). However, the management guided for 1,025–1,050kt of mined and refined metals due to demand uncertainty in the current scenario. The company remains confident of achieving >1,100t volumes – provided the COVID situation improves by May-end. Silver volumes are guided at 720t for FY22. We factor in refined metal volumes of 1,060kt.

* CoP is guided at <USD1,000/t v/s USD954/t in FY22.

Valuation and view

* We expect HZ’s EBITDA to grow at a 19% CAGR over FY21–23E, primarily led by a ~9% CAGR in refined metal volumes to 1,128kt.

* With the outlook for zinc prices remaining strong, we build in USD2,750/USD2,700 per ton for FY22/FY23E.

* We remain Neutral on 6.0x FY23E EV/EBITDA, with TP of INR290/share. The stock trades at 6.7x FY23E EV/EBITDA, which prices in attractive dividend yield and potential EBITDA growth, in our view.

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