Limited near-term upside in Hindustan Zinc stock; firm aiming for expansion

Hindustan Zinc’s (HZL)’s revenue for the October-December quarter (Q3) of 2024-25 (FY25) was Rs 8,650 crore, up 18 per cent year-on-year (Y-o-Y) and 4 per cent quarter-on-quarter (Q-o-Q), on account of higher zinc and silver prices and a strong dollar. The Ebitda stood at Rs 4,500 crore, up 28 per cent Y-o-Y (up 9 per cent Q-o-Q) with lower-than-expected cost of production. The Ebitda margin was 52.2 per cent, up 250 bps Q-o-Q. The zinc Cost of Production (CoP) per tonne for Q3 of FY25 stood at $1,041 (Rs 87,960), down 5 per cent Y-o-Y (down 3 per cent Q-o-Q vs $1,071 in Q2FY25).

 

The improvement was due to higher metal grades and better domestic coal availability, supported by increased renewable energy. The adjusted PAT stood at Rs 2,700 crore, up 32 per cent Y-o-Y (up 15 per cent Q-o-Q). For 9MFY25, revenue grew 17 per cent , Ebitda grew 26 per cent , and adjusted PAT rose 30 per cent Y-o-Y. Hedging gain during the 9MFY25 period was Rs 58 crore. Advance royalties of Rs 650 crore for FY25 have been paid. Q-o-Q, net debt declined by 28 per cent to Rs 4,120 crore with good operating cash flow (OCF) and efficient working capital management.

 

The mined metal for Q3FY25 stood at 265,000 tonnes, down 2 per cent Y-o-Y, with lower ore production, partly offset by improved mined metal grades and mill recovery. However, volume rose 3 per cent Q-o-Q. The total refined metal production was flat Y-o-Y at 259,000 tonnes and marginally down Q-o-Q due to planned maintenance shutdowns.

 

The refined zinc volume stood at 204,000 tonnes flat Y-o-Y (up 3 per cent Q-o-Q) and the refined lead volume stood at 55,000 tonnes, down 2 per cent Y-o-Y (down 13 per cent Q-o-Q). Silver volume stood at 160 tonnes, down 19 per cent Y-o-Y (down 13 per cent Q-o-Q). 

 

For FY25, the management retained its mined metal production guidance of 1.1–1.125 million tonnes and refined metal production of 1.075–1.10 million tonnes. The management maintained its zinc CoP guidance of $1,050-1,100 per tonne for FY25 and aimed for the lower end of the band. The silver volume guidance for FY25 is in the range of 700-710 tonnes vs earlier guidance of 750-775 tonnes. Management targets zinc CoP at $1,000 per tonne by FY26 end and below $1,000 per tonne by the end of FY27.

 

The performance was largely in line with consensus. The company continues to focus on tight cost control. HZL will be increasing its capacities from 1.20 million tonnes per annum (tpa) to 1.45 tpa by FY28 and then adding another 500,000–550,000 tpa single plant. The total expected capex for this expansion is $2-2.5 billion.

 

The 510,000 tonnes DAP fertiliser plant at Chanderiya is progressing as per timelines and will be commissioned by Q4FY26. It is expected to generate Ebitda of Rs 450-500 crore with revenue of Rs 2,000 crore. A new roaster at Debari will be commissioned by Q4FY25.

 

Hindustan Zinc’s Alloy Plant generated Ebitda of Rs 43 crore for Q3FY25 with PAT of Rs 31 crore. At peak capacity, it should generate Rs 200 crore of Ebitda per annum with an effective tax rate of 17.44 per cent. About 18-20 per cent of energy will be RE (renewable energy) by the end of the next quarter (guidance down from 25 per cent estimated earlier). The current share is 15 per cent.

 

Despite technical difficulties, fumers (which recover silver and other precious metals from waste) are ramping up. Design inefficiencies and possible problems with parts have been identified in the last 5-6 months. The fumers should start giving good results by Q4FY25 and it has yielded 5 tonnes of silver so far and is running at a 30 per cent utilisation level as per designed capacity (expected to reach 60 per cent by the end of FY25).

 

A net impact of Rs 83 crore has been provisioned for exceptional items as HZL awaits a Supreme Court ruling on retrospective taxes on royalties. The company expects a reversal in Q4FY25 as no tax notices have been received.

 

According to Bloomberg, 3 out of 8 analysts polled post Q3 results are bearish on the stock, while another 3 are neutral and just two are bullish. Their average one-year target price is Rs 458 for the stock which closed 1.1 per cent higher on Wednesday at Rs 438.15 on the BSE.