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Slight earnings beat over strong NSR and lower costs

* Hindustan Zinc (HZ) reported revenue of INR137b (+77% YoY and +2% QoQ) against our est. of INR127b. The growth was driven by favorable commodity prices, higher by-product realization, and a stronger dollar.

* EBITDA stood at INR80.5b (+109% YoY and +5% QoQ) and was 5% above our estimate. The beat was primarily driven by favorable metal prices and lower cost of production. EBITDA margin stood at 58.6% in 1QFY27 vs 56.9% in 4QFY26 and 49.7% in 1QFY26.

* Zinc COP (ex-royalty) stood at USD851/t in 1QFY27, declining from USD903/t in 4QFY26 and USD1,319/t in 1QFY26. The CoP decline was primarily on account of better renewable power consumption and better mined grades.

* APAT for the quarter stood at INR54.7b (+145% YoY and +9% QoQ), against our est. of INR50b.

* Mined metal for the quarter stood at 268kt (flat YoY and -15% QoQ), driven by better grade. Refined metal production for the quarter stood at 260kt (+4% YoY), declining 8% QoQ, driven by planned maintenance activities at the lead smelter. Refined zinc production stood at 213kt (+5% YoY and -6% QoQ, while refined lead production stood at 47kt (-2% YoY and -15% QoQ).

* Silver volumes grew 2% YoY to 149kt, while declining 16% QoQ, in line with lead production volumes during the quarter.

Key management commentary

* Management reiterated its FY27 refined metal production guidance of 1.1mt and expects to achieve the target through higher volumes in 2Q4QFY27, as no further maintenance shutdowns are planned.

* The company maintained its FY27 silver production guidance of 680t, supported by higher silver grades, favorable mine sequencing, and additional silver expected from work-in-progress inventory.

* Zinc CoP (ex-royalty) declined to a record USD851/t in 1QFY27. Management indicated that 2Q CoP could improve further, led by higher volumes and stronger sulphuric acid prices.

* Domestic linkage coal availability declined sharply to 36% in 1QFY27 (vs 64% in 4QFY26), resulting in higher imported coal consumption and elevated power and fuel costs.

* The company currently has 48kt of zinc hedged at USD3,162/t and 34t of silver hedged at USD63/oz, with no fresh hedges undertaken in FY27 due to market volatility. In 1QFY27, the company witnessed hedge losses of ~INR2b.

* Management reiterated that silver continues to remain a key earnings driver, contributing ~46% of quarterly profitability, with medium-term fundamentals supported by structural demand from solar, electronics, and electrification.

Valuation and view

* HZ continues to report strong earnings, primarily driven by favorable metal pricing and better grades. The company continues to focus on increasing production output with tighter cost-control measures, which could lead to margin sustenance.

* The recently announced expansion plans are aligned with its long-term objective of doubling existing capacity and enhancing long-term earnings visibility. Although near-term earnings growth is capped due to limited capacity headroom, the LME/silver price inflation emerges as the key catalyst for incremental upside in the near term. We maintain our FY27/28 estimates and believe further price volatility could remain a potential risk or reward for earnings visibility.

* At CMP, HZ trades at 6.9x FY28E EV/EBITDA, and we believe the current valuation has priced in all the positive factors. We reiterate our Neutral rating with a TP of INR570 (premised on 7.5x EV/EBITDA on FY28E).

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