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Earnings beat over favorable LME and lower CoP

* Hindustan Zinc’s (HZ) revenue stood at INR151b (+77% YoY and +10% QoQ) against our estimate of INR136b. Growth was driven by favorable commodity prices, better volume, and a stronger dollar.

* EBITDA stood at INR92.5b (+108% YoY and +15% QoQ; vs. our estimate of INR83b) on account of favorable metal prices and lower cost of production. EBITDA margin stood at 61.3% in 2QFY27 vs 58.6% in 1QFY27 and 52% in 2QFY26.

* Zinc CoP (ex-royalty) stood at USD703/t in 2QFY27, declining from USD851/t in 1QFY27 and USD994/t in 2QFY26, primarily driven by better grades, higher by-product NSR, and a greater RE share. These benefits were partially offset by a lower share of domestic coal and inflated input costs amid ongoing global geopolitical crisis.

* APAT stood at INR64.1b (+142% YoY and +17% QoQ) in 2QFY27, against our estimate of INR54.8b.

* Mined metal for the quarter stood at 271kt (+5% YoY and +1% QoQ), driven by higher ore production.

* Refined metal production for the quarter stood at 264kt (+7% YoY and flat QoQ), mainly driven by additional capacity unlocked through smelter debottlenecking. The refined zinc production was 214kt (+6% YoY and +1% QoQ), while refined lead production stood at 51kt (+14% YoY and +9% QoQ) during the quarter.

* Saleable silver volume rose 17% YoY and 16% QoQ to 173kt, in line with lead production in 2QFY27.

Key management commentary

* Management reiterated its FY27 refined metal production guidance of 1.1mt. Despite producing 321t of silver in 1HFY27, management maintained its silver guidance of 680t, including concentrate sales.

* For FY27, management revised its CoP guidance to USD825-850/t from USD975-1,000/t earlier, led by higher sulphuric acid prices, partly offset by USD50/t of cost inflation amid geopolitical disruptions. For 3QFY27, management expects CoP to remain broadly at current levels.

* HZ has hedged 40kt of zinc for 3QFY27 at USD3,476/t and 36kt for 4QFY27 at USD3,698/t. Moreover, it has hedged 8t of silver for 3QFY27 at USD68/oz.

* Management also highlighted that domestic linkage coal accounted for 32% of coal consumption in 2QFY27 vs. 36% in 1QFY27 and 64% in 4QFY26, indicating continued exposure to imported coal.

* HZ continued to advance its decarbonization initiatives, with renewable share accounting for 27% of power consumption in 2QFY27. Management aims to increase it to 35% over the coming quarters.

Valuation and view

* HZ reported strong earnings in 2QFY27, primarily driven by favorable metal pricing, better grades/volume, and higher by-product NSR, which supported lower CoP. The company continues to focus on ramping up production, improving operational efficiencies, and maintaining tighter cost control, which should support margin sustenance.

* The recently announced expansion plans align with HZ’s long-term objective of doubling its existing capacity and enhancing long-term earnings visibility. However, near-term earnings growth is likely to remain constrained by limited capacity headroom, making LME/silver price inflation the key catalysts for incremental earnings upside.

* Further, HZ’s entry into critical minerals is expected to diversify its high exposure to a single metal, reducing metal-led volatility in the future.

* We increase our earnings estimates, with revenue and EBITDA revised upward by 6% for FY27 and ~4% for FY28, incorporating silver volume guidance of 680t for FY27 and 700t for FY28. We believe further price volatility could remain a potential risk or reward for earnings.

* At CMP, HZ trades at 6.4x 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 INR600 (premised on 7x EV/EBITDA on FY28E).

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