Expansion positives factored into the valuations of Hindustan Zinc

The company expects revenues to rise from Rs 34,100 crore in FY25 to Rs 40,000-42,000 crore with phase-I expansion, and further rise to Rs 62,000 to Rs 65,000 crore upon completion of plan

The board of Hindustan Zinc Ltd (HZL) has approved a capital expenditure (capex) plan of ₹12,000 crore to be funded through internal accruals and debt to expand zinc smelting capacity by 250 kilo tonnes per annum (KTPA) at Debari in Rajasthan along with a mine capacity expansion of 330 KTPA. At an investor meet held by the company, the management announced that the expansion is expected to be completed in the next 36 months, with capex across FY26-FY28. The guidance is ₹3,500 crore capex in FY26, ₹5,000 crore in FY27, and the remaining in FY28.

 

Of the capex, ₹6,250 crore will be allocated to expanding zinc smelting capacity at Debari at a cost of $2,500 per tonne of capacity, which is lower than global average of $3,500 per tonne. This includes ₹1,000-1,200 crore for associated facilities such as a leaching & purification plant, cell house, and roaster. The remaining capex will be on mine expansion. The smelter expansion project will have its own fumer facility, which will produce additional 30 tonne per annum of silver. Following the completion of Phase-I, the refined metal capacity will reach 1.379 million tonnes per annum, or MTPA (1.169 MTPA of zinc and 0.21 MTPA of lead), with refined silver capacity rising by 30 TPA to 830 TPA.

 

The existing capacity of 1.129 MTPA operated at a utilisation level of 93 per cent in FY25. The Phase-I expansion will add 22 per cent to capacity. Phase-II will approximately double the refined base metal capacity to 2 MTPA (1.6 MTPA of zinc and 0.4 MTPA of lead), and silver capacity to 1.5 KTPA. Guidance is that cost of production will remain competitive at $1,025-1,050 per tonne. 

 

The company expects revenues to rise from ₹34,100 crore in FY25 to ₹40,000-42,000 crore with Phase-I expansion, and further rise to ₹62,000-65,000 crore upon completion of plan. Operating profit is expected to increase from ₹17,400 crore in FY25 to ₹21,000-22,000 crore after Phase-I, and rise to ₹34,000-36,000 crore after Phase-II, if London Metal Exchange (LME) prices and exchange rates remain stable through to FY28.

 

The capex plans are in line with the long-term target to double capacity along with cost-control. HZL has a 77 per cent market share in primary zinc, with production of 1,095 KT in FY25. Refined metal reached 1,052 KT in FY25. Domestic steel production and increased demand for galvanised steel will drive 8 per cent year-on-year (Y-o-Y) growth in domestic zinc demand.

 

Smelting is power-intensive. Power and fuel cost was 16 per cent of total costs during FY25 (19 per cent in FY24). HZL has signed agreements for sourcing 530 megawatt (Mw) of renewable power at a fixed rate for the next 25 years to insulate against coal supply issues and price volatility. The renewable energy (RE) component will rise to 30-35 per cent of all power needs from earlier 13 per cent. The long-term target is 70 per cent from RE to reduce cost below $1,000 per tonne.

 

The upcoming 160 KTPA roaster at Debari will enable HZL to reach 1.13 MTPA refined metal production from FY27 onwards. The doubling to 2 MTPA will support sustained volume growth. A focus on exploration has pushed Resources & Reserves (R&R) up by over 3 times compared to FY20.

 

Silver is both an industrial metal and a financial asset. HZL is India’s only primary silver producer and fourth-largest globally. HZL’s silver output has increased from 35 tonnes in FY04 to 687 tonnes in FY25. The company operates a silver refining capacity of 800 tonnes at Pantnagar in Uttarakhand, which is expected to increase to 1,500 tonnes by calendar year 2030 (CY30). The upgrade of its zinc fumer plant will contribute an incremental 33 tonnes annually by recovering silver from smelting waste.

 

For FY26, the management has guided for silver volume at 700 tonnes (declined 8 per cent Y-o-Y to 687 tonnes in FY25). A 10 per cent increase in silver prices could lead to an incremental operating profit of ₹550-575 crore. Strong industrial demand and a weaker dollar have supported silver price, which rose 29 per cent Y-o-Y in FY25.

 

The stock is trading at higher valuations and some analysts feel the current price discounts the positives. Stake sales by government or by Vedanta could cause share price volatility.