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Earnings outlook remains strong, but priced in Maintain Neutral

* Hindustan Zinc (HZ)’s 1QFY22 results were impacted by lower production, weighed by the second COVID wave and higher CoP, partly offset by higher metal prices. While EBITDA declined 8% QoQ to INR35.6b, a higher tax rate of 34% (due to the income mix change and lapse of tax incentives) led to 15% decline in adj PAT to INR21.2b.

* We cut our FY22E/FY23E EPS estimate by 6%/9%, primarily factoring in the higher tax rate. We expect a 9% CAGR in HZ volumes over FY21–23E, which would drive a 21% EBITDA CAGR. However, we believe this growth is factored into the current valuation; therefore, we assign a Neutral rating.

Lower volumes and higher CoP lead to 8% QoQ decline in EBITDA

* Revenue / EBITDA / Adj PAT stood at INR65.3b/INR35.6b/INR21.2b (-6%/- 8%/-15% QoQ), in line with our estimate.

* Mined metal production declined 23% QoQ to 221kt (-12% v/s est) on lower ore production at mines – due to the lack of operator availability (amid the second COVID wave). Integrated metal production, however, declined just 8% QoQ to 236kt (in line with est.) as the company utilized brought-forward metal concentrate inventory. As a result, zinc/lead sales declined 6%/21% QoQ to 187kt/49kt. Silver sales declined 21% QoQ to 160t.

* Reported Zinc CoP increased 13% QoQ to USD1,070/t on higher input costs, such as coal and diesel, and lower production levels.

* The tax rate during the quarter was higher at 34% v/s the usual rate of 25%, due to a change in the income mix and the lapse of some tax incentives. The management guided for a full-year tax rate of 30%.

* Silver contributed 17.3% to revenues in 1QFY22 v/s 20.0% in 4QFY21. The share of silver in HZ EBIT stood at 33.9% v/s 38.2% in 4QFY21.

* The net cash balance increased by INR21.2b QoQ to INR172.5b.

Volume and CoP guidance maintained

* The management highlighted that the global zinc demand environment remains buoyant. Furthermore, low inventory levels at LME (eight days of consumption) should support prices. Domestic zinc demand has improved since Jun’21.

* The management maintained the production, cost, and capex guidance provided earlier. The production guidance for mined and refined metals stands at 1,025– 1,050kt, whereas silver volume guidance stands at 720t for FY22.

* Despite higher CoP of USD1,070/t in 1QFY22, the management retained its CoP guidance of for FY22.

Valuation and view

* With the outlook for zinc prices remaining strong, we build in USD2,830/USD2,750 per ton for FY22/FY23E.

* We remain Neutral on 6.0x FY23E EV/EBITDA, with TP of INR300/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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