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In-line performance; silver segment to drive earnings

* 1QFY26 revenue declined 4% YoY/15% QoQ to INR77.7b, in line with our est. of INR75.7b. The decline was primarily driven by lower volumes and low commodity prices, offset by higher prices of silver and by-products and stronger dollar.

* EBITDA was down 2% YoY/20% QoQ at INR38.6b, primarily due to weak volumes and softened commodity prices. EBITDA margin contracted to 49.7% from 53% in 4QFY25 and 48.5% in 1QFY25.

* Zinc cost of production (CoP) stood at USD1,010/t, down 9% YoY (+2% QoQ), on account of improved metal grades and increased consumption of domestic coal and renewable energy.

* APAT stood at INR22.3b (-5% YoY and -26% QoQ) against our est. of INR21.5b in 1QFY26.

* Mined metal stood at 265kt (flat YoY and -15% QoQ), led by mine preparation activities carried out during the quarter.

* Refined metal production at 250kt (-5% YoY and -7% QoQ - Refined zinc/lead production of 202kt/48kt), in line with plant availability and on account of maintenance activities.

* Saleable silver production declined 11% YoY and 16% QoQ to 149kt, majorly due to lower silver input from SK mine and in line with lead production.

Key management commentary

* The reduction in CoP was on account of better mine grades, higher RE share via Serentica, and higher domestic coal usage amid muted imported coal prices.

* Considering improvements in efficiency, the company is confident of achieving the lower end of its full-year cost guidance (USD1,025-1,050/t).

* The completion of debottlenecking projects and the commissioning of a new roaster in 2Q will boost silver and metal production, supporting FY26 guidance of 700-710t.

* The fumer plant is operating at 60% capacity utilization, limited by lower silver input and delays in Chinese visa approvals for technical support.

* The 510kt DAP/NPK fertilizer plant at Chanderiya is in progress and will be commissioned by 1QFY27 (earlier 2QFY26). Out of the total FY26 capex of INR12b, HZ has already spent INR10b so far.

* In Jun’25, the company announced its plans to expand integrated refined metal capacity by 250ktpa, along with matching mines & mills capacity, with an investment of INR120b (guidance: INR35b in FY26, INR50b in FY27, and the rest in FY28). The expansion is expected to be completed in the next 36 months.

Valuation and view

* The expansion plans are in line with the company’s long-term target of doubling its capacity. It also continues to focus on improving production with tight costcontrol measures.

* We retain our earnings estimates for FY26-27E and expect HZ to maintain its focus on profitability. Additionally, the favorable pricing condition (especially Silver) could support the margins further.

* At CMP, HZ trades at 7.8x FY27E EV/EBITDA, and we believe the current valuation prices in all the positive factors. We reiterate our Neutral rating with a TP of INR465 (premised on 8.5x EV/EBITDA on FY27 estimates).

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