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HZ – Silver exposure underpriced

Hindustan Zinc (HZ) is a key beneficiary of the uptrend in silver prices, which are up 63% YTD. We believe the exposure to silver is underpriced as the consensus expectations trail the strong move in silver in recent months with the metal now trading at USD47/oz (vs USD34/oz in Q1FY26 and USD30/oz in FY25). Global peers like Fresnillo and Grupo Mexico have already re-rated YTD, and we therefore see a strong potential for HZ to be repriced higher, to reflect current prices. HZ (not rated) contributes 40% to VEDL’s EBITDA and is the core part of the group portfolio. Per our calculations, a USD1/oz move in silver prices has 1% sensitivity to HZ’s EBITDA. Interestingly, silver is a by-product of zinc which implies that 88% of silver revenue is a direct pass-through to EBITDA as the cost of production remains tied to zinc production. We retain BUY on VEDL, with an unchanged TP of Rs525.

Silver exposure underpriced

We believe HZ/VEDL’s exposure to silver is underpriced, as the consensus expectations trail the strong move in silver in recent months with the metal now trading at USD47/oz (vs USD34/oz in Q1FY26 and USD30/oz in FY25). Global peers like Fresnillo and Grupo Mexico have already re-rated YTD (Exhibit 12), and we therefore see a strong potential for HZ to be repriced higher, to reflect current prices; this inherently benefits VEDL. Silver prices are witnessing a strong uptrend on the back of a structural supply/demand deficit (with annual supply of ~1bn oz, while demand is estimated at ~1.1bn oz), with a global cyclical recovery alongside a weak DXY acting as a tailwind.

HZ – Quantifying the sensitivities

We calculate that a USD1/oz move in silver prices has 1% sensitivity to HZ’s EBITDA (Exhibits 6-7). Silver being a by-product of zinc suggests that 88% of silver revenue is directly passed-through to EBITDA as the cost of production remains tied to zinc production. Even as silver contributes 20-25% of HZ’s revenue profile, the contribution at the EBITDA level is 35-40%. HZ delivered EBITDA of Rs174bn, generating EBITDA margin of 53% in FY25; we expect it to generate EBITDA of Rs220bn with 57% margin in FY27E, should spot prices of zinc and silver uphold.

In a global context

HZ is a sizable silver miner globally, with annual production of 22.5Moz. In the global context, Fresnillo mines 52.5Moz, GMexico 12.1Moz, and Newmont 28.0Moz. HZ is positioned in the first quartile of the global zinc cost curve, with the life of mine being 25 years. In addition, HZ screens highly on global ESG metrics, ranking # 1 in the S&P corporate sustainability assessment for 2024 in Metals & Mining. The company is also focusing aggressively on energy transition, with renewable energy usage of 13% currently, and target to reach 70% by FY28.

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