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Higher prices offset cost inflation 

Hindustan  Zinc  (HZ)  reported  EBITDA  of  Rs51.4bn  (CentrumE:  51.2bn),  in  line  with  our estimate.  EBITDA  increased  ~3.5% QoQ,  due  to  higher  zinc  realisation  (up  8.4% QoQ  to USD4,322/t) and higher lead & silver volume offset by higher CoP. The zinc  realisation/t was higher than average market rate for Q1 at USD3,914/t on account of ~45% of Q1FY23 volume being hedged at ~USD4,100/t. The CoP of zinc ex?royalty increased by 11% QoQ to USD1,264/t primarily due to increase in coal prices. HZ received board approval to set up 0.5mtpa  fertilizer  plant  and  roaster  plant  for  estimated  capex  of  Rs20?22bn  in  100% subsidiary and is expected to be commissioned by FY24?end. Moreover, HZ is evaluating organic expansion by setting up smelter in Gujarat and via inorganic route through overseas acquisitions  (Vedanta  –  International  Zinc  business  are  under  review).  Besides fundamentals, the stock price move will depend on getting clarity on how GoI (29.5%) will sell its stake. We see limited upside and prefer to wait for lower entry point. We value HZ at 6.5x FY24E and maintain our TP of Rs295. Reiterate REDUC

Higher prices partially offset by increase in cost   

Zinc realizations (derived) grew 8.4% QoQ to USD4,322/t aided by ~45% of Q1FY23 volume being hedged at ~USD4,100/t (Q1FY23 average LME price was USD3,914/t). The overall 21% of FY23 volume is being hedged at USD4,100/t but its front loaded and will be over by Q2FY23. Our calculation indicates that ~45% of Q1FY23 and ~40% of Q2FY23 volume is being hedged at ~USD4,100/t, helping to offset higher CoP. Blended lead realizations was down by 7% QoQ at USD2,373/t. Refined zinc CoP ex?royalty was up by USD128/t (11%) QoQ to USD1,264/t, primarily due  to increase in coal prices despite higher linkage coal procurement  from Coal India (8% of requirement in Q1FY23 vs 3% in Q4FY22). HZ has outstanding 1mt coal to receive from COAL India and hence expect linkage supply will improve in H2FY23 which will help to reduce cost. Although mined metal production decreased 15% QoQ to 252kt, refined zinc? lead sales volume was down by 4% QoQ to 206kt, due to usage of mined metal inventory. Silver volume increased 9% QoQ to 177t in?line with lead while realization was down by 2% QoQ at Rs62,655/kg. As a result, silver EBIT, at Rs9.83bn (~21% of total EBIT), was up 9% QoQ. Overall EBITDA was up 3.5% QoQ to Rs51.4bn.

Zinc prices fall from highs amid fear of demand slowdown despite low inventory

LME zinc prices  fell  from highs of ~USD4,500/t  (April average USD4,360/t)  to ~USD2,950/t due to fear of demand slowdown amid rising interest rates globally. This is despite very low Inventories at  LME warehouses  (~  79.5 kt) and  possibility  of  further  production  cuts. As a result, we expect LME zinc prices to hover around current levels before falling marginally with easing of energy prices by CY22?end. We factored in average LME zinc price of USD3,100/t in FY23E and USD2,700/t in FY24E

Awaiting clarity on GoI’s stake sale; reiterate Reduce .

Zinc prices are expected to hover around current levels for some time before moving down due  to expected  demand  slowdown in H2FY23. Though HZ’s Q2FY23  zinc  CoP  will  remain elevated, it should come down in H2FY23 with availability of higher proportion of linkage coal from Coal India, helping to offset expected lower zinc prices. This will help it to record EBITDA of Rs154bn, down 5% QoQ. We do not expect any further dividend (paid interim dividend of Rs21/share in July 2022) in FY23. Besides fundamentals, the stock price move will depend on getting clarity on how GoI (29.5%) will sell its stake. We see limited upside and prefer to wait for lower entry point. We reiterate Reduce with TP of Rs295.

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