Strong demand, demerger hopes positive for Hindustan Zinc's stock

The Q4FY24 and FY24 results of Hindustan Zinc, a leading producer of zinc, lead and silver, indicated that the cycle for non-ferrous metals may be close to bottoming out. While Q4FY24 revenue stood at Rs 7,500 crore (down 11 per cent year-on-year) there was sequential quarter-on-quarter (Q-o-Q) revenue growth of 4 per cent vs Q3FY24. The sequential growth was driven by better zinc volumes.

The operating profit stood at Rs 3,600 crore (down 14 per cent Y-o-Y and up 4 per cent Q-o-Q), and the operating profit margin was flat Q-o-Q at 48.3 per cent. Cost of production stood at $1,051/ tonne (Rs 87,284), the lowest in the past 11 quarters and the fifth consecutive quarter of cost reduction driven by better grades and lower coal and other input prices. The adjusted net profit stood at Rs 2,000 crore (down 21 per cent Y-o-Y but flat Q-o-Q). Full-year adjusted net profit stood at Rs 7,700 crore (down 26 per cent Y-o-Y).

Base metal prices on London Metal Exchange (LME) have risen along with global activity. In April, zinc prices moved up by 16 per cent from Q4FY24 averages. The ban imposed by the US and UK on trading metals (aluminium, copper and nickel) originating from Russia has fuelled price movements. However, base metal inventories continued to be in surplus over the last fiscal.

Mined metal volume for Hindustan Zinc in Q4FY24 stood at 299 kilo tonnes (kt), down 1 per cent Y-o-Y and up 10 per cent Q-o-Q, due to higher ore production and improved mined metal grades. Refined zinc volume stood at 220 kt (up 2 per cent Y-o-Y and up 8 per cent Q-o-Q) and refined lead volume was 52 kt (down 4 per cent Y-o-Y and down 7 per cent Q-o-Q).

Silver volume was at 189 tonnes (up 4 per cent Y-o-Y and up 4 per cent Q-o-Q) in Q4FY24. For FY24, mined metal volumes increased by 2 per cent Y-o-Y to 1,079 kt. Refined zinc volume was flat Y-o-Y at 817 kt, while lead volume grew 2 per cent Y-o-Y to 216 kt.

For FY25, the management expects mined metal production of 1,100-1,125 kt and refined metal production of 1,075-1,100 kt. Silver production is expected to be around 750-775 million tonnes. Domestic zinc demand is likely to remain strong, driven by the focus on infrastructure development. For FY25, the management expects capex of $270-325 million.

The management expects zinc’s cost of production to be at $1,050-1,100 per tonne in FY25. For FY25, capex is pegged at $270-325 million. Once the ongoing alloy facility is completed, it will increase value-added products to 25 per cent from the current 18-20 per cent. The company has received the approvals for operating the Bamnia Kalan mines in Rajasthan and it is looking to finalise a business partner.

The 160 kt roaster at Debari in Rajasthan is expected to be commissioned by Q4FY25. It will help Hindustan Zinc achieve refined metal capacity of 1.2mt. Hindustan Zinc also plans to scale up smelters to a designed capacity of 1,123 kt per annum. A 510 kt fertiliser plant at Chanderiya will be commissioned by FY26, which is expected to generate operating profit of Rs 350- 400 crore.

There is robust industrial demand for silver due to photovoltaics, power grid, 5G networks, consumer electronics and automobiles. The company is the third-largest producer. Demand for zinc remains robust across India, Vietnam and Mexico. Demand for lead is expected to remain strong, driven by higher demand from the automobile segment.

A proposed demerger may unlock value by establishing distinct entities for zinc and lead, silver, and the recycling business. Hindustan Zinc has also entered into power delivery agreements with Serentica Renewable India Private for Dariba 200 MW and Chanderiya 250 MW.