Hindustan Zinc rating – Neutral: Results were in line with estimates

FY23 guidance disappointed; FY23/24e EPS up 3/4% due to high LME prices; target price raised to Rs 370

Revenue stood in line at Rs 88 bn (up 27% y-o-y and 10% q-o-q) in Q4FY22, led by higher LME prices, but was partly offset by flat lead prices. Ebitda stood at Rs 50 bn (up 28% y-o-y and 14% q-o-q). Power and fuel costs stood at Rs 8 bn, up 10% q-o-q, led by higher coal prices. Other expenses rose 11% q-o-q to Rs 19 bn, but were partly offset by inventory accumulation.

PAT grew 18% y-o-y and 8% q-o-q to Rs 29 bn, marginally below our estimate. Revenue/Ebitda/PAT stood at Rs 294/162 /97 bn in FY22, up 30%/39%/22% y-o-y. The growth was driven entirely by 34%/22% y-o-y growth in LME zinc/lead prices as metal sales volumes remained flat y-o-y.

FY23 guidance disappoints
Mgmt has guided at flat production growth in FY23, which hints at the possibility of firm reaching peak mine output, unless large-scale expansion is achieved. Mined metal production is to be marginally higher at 1,050-1,075kt. We note that mgmt has guided at an elevated cost structure. We believe this is largely on account of their expectation of high coal and other input costs. HZ is primarily dependent on imported coal as coal linkages met only 3% of its total requirement in FY22.

Valuation driven entirely by LME
HZ is among the lowest cost producers of zinc globally. Yet, it is facing severe cost pressures, especially from rising coal costs, for which it has no alternative. Mgmt has guided at a refined production of 1,000-1,025kt in FY23. This has resulted in a 8% cut in our FY23 volume estimate. We have cut our FY23 zinc/lead/silver sales volume by 8%/10%/8%, factoring in the lower management guidance. However, we have raised our FY23 zinc/lead LME price assumption by 37%/3%, given the tight zinc market, which is driving LME prices higher. With higher energy prices in Europe and low physical stocks in the US, prices are likely to remain elevated for some time before normalising.

We raise our FY23 Ebitda/EPS estimate by 14%/3% and by 18%/4% for FY24 given the increase in LME prices. The same is partly offset by a decline in FY23 volumes. The stock is trading at 6.5x our FY23 EV/Ebitda estimates. Despite a 37% rise in zinc prices and our TP being raised to Rs 370 per share (from `325 earlier), we maintain our Neutral rating, an upside of 8% from current levels.