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Set for next phase of growth

Hindustan Zinc (HZL) continues to prepare for its eventual leap towards 1.2mtpa and then 1.35mtpa of mined metal production. While, FY22 was expected to witness rampup in production to 1.2mtpa, second wave of Covid outbreak in India seems to have postponed the same. Management guided for a conservative 11.5% YoY mined metal production growth (mid-point). Similarly, silver production guidance has been stemmed down to 720te. The decline in guided range because of Covid is more than offset by commodity inflation, as can be seen in our FY22E earnings (up 10%). We maintain REDUCE given the rich valuations with a revised target price of Rs280/share (Rs257/share earlier).

* Operational performance surprises. Zinc sales volumes came in at ~195,000te (up 13% YoY, 7% QoQ, marginally higher than our estimate of 188,000te), lead sales volume came in at ~61,000 tonnes (up 27% YoY, and 15% QoQ) higher than our estimate of 55kte, while silver sales volume came in at ~203te (up 21% YoY, and 6% QoQ). Mined metal production was up 15% QoQ on higher ore production and better overall grades. FY21 MIC production was up 6% YoY to 972kte, despite 18 days of production lost, grade slippage and other workforce related restrictions. Full year cost of production (CoP) was US$954/te, down 9% YoY. Management has guided for < US$1000/te CoP for FY22.

* FY22E production guidance moderated to factor in disruption on account of current pandemic. Mined metal and refined metal production is expected to be at ~ 1025-1050kte. This compares to metal production of 930kte for FY21. Better lead production growth, up 18%YoY in FY21, and better silver grades at SK mine allowed 16% YoY growth in silver production to 706te in FY21. Management has guided for 720te of silver production in FY22. The production guidance for FY22, is slightly below expectation. Perhaps on account of Covid induced disruption in Q1FY22.

* Preparatory work for three major expansion projects underway. Management highlighted ~ US$100mn project capex for FY22. Preparations for engineering design for the Gujarat Smelter and the Fertiliser plant are underway. On completion of the same, the proposal will be presented to the board. Preparatory work is also underway to expand integrated smelting from 1.2 to 1.35mtpa. At current mining rate reserves and resources underpins metal production for more than 25 years. Expansion of mining plan would require EC approval. Proposal for integrated expansion willo be presented to the Board by Q2/Q3FY22 and the majority of the capex spend will happen in FY23/24E

* Maintain REDUCE. We maintain REDUCE on HZL, with a revised target of Rs 280/share.

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