But for Covid-19, volume scenario for FY21 was bright; dividend outlook and execution of 1.2-mtpa project behind ‘Buy’ rating
Hindustan Zinc (HZL) reported an in-line Ebitda of Rs 19.6 bn (I-Sec: Rs 20.6 bn). While integrated zinc and lead production came in at 221kte (down 3% y-o-y), Covid-19 (C19) closures from 22nd Mar’20 reduced the same by 27kte. Lead/silver production increased 20%/12% q-o-q and reflects resolution of the geo-technical factors that previously impacted SK Mines’ production. Such a tailwind will aid volume recovery with further support from the commissioned Rampura Agucha shaft (to aid mining of 5mtpa).
Increased capacity of RD Mine shaft (phase-wise) as well as backfill projects of Zawar and the fumer projects on the verge of commissioning would have put FY21e in a much better stead but for the uncertain demand picture due to Covid-19. All these measures, along with lower coal prices, allow the management to be more constructive on CoP for FY21 (guided to be down 5-10% y-o-y). Continued dividend upstreaming is also a near certainty in HZL now.
Maintain Buy with an unchanged TP of Rs 195/share.
Cost is a key focus; our FY22e estimates should be comfortably achieved: HZL is targeting a reduction of 5-10% y-o-y in CoP vis-à-vis the $1,047/te registered in FY20 – with savings partly expected from shaft commissioning in Rampura Agucha and partly due to reduction in commodity prices . ~35% of the cost base is fixed and ~40-45% is USD-linked and primarily driven by coal.
The manpower cost reduction in Q4FY20 was due to writeback of year-end ‘performance-pay’ provisions. We have assumed higher employee costs against the management-guided range of Rs 1.9-2 bn of the quarterly run-rate. Also, despite assuming higher volumes in FY22e (metal production up 25% y/y), our CoP assumptions are largely constant y-o-y, and we would expect HZL to outperform the same.
Expansion to 1.2 mtpa of mined metal is complete; we expect 25% increase in integrated metal production in FY22e: Mined metal output expansion to 1.2 mnte is complete. Rampura Agucha UG shaft is commissioned and ore hauling has started. Backfilling in Zawar and the fumer projects is to start by end of May’20. There have been slight delays (few months) in commissioning of some of the works. Commissioning of these projects along with resolution of geo-technical issues in SK Mines, would have put FY21e in a much better stead (volume performance) for HZL but for the uncertain demand picture due to Covid-19. We expect FY22e to see a 25% increase in metal production.
Maintain BUY: While HZL has suspended guidance till Q1FY21, we have adequately discounted for the earnings weakness that FY21e can witness. Strong visibility on continued dividends, completion of the 1.2-mtpa expansion, and a relatively moderate zinc price assumption as Chinese demand recovers, drive our rating rationale.