Incorporated in 1966 and headquartered in Udaipur, India, Hindustan Zinc is the world's second-largest integrated zinc producer and the third-largest silver producer, with an annual ore capacity of 16.3mn tonnes and an annual metal production capacity of 1.1mn tonnes. The company is majority-owned by Vedanta Ltd., which holds 63.42% of the shares, 27.92% by the government of India, and the rest by the public, FIIs, and DIIs.
Zinc and lead are the key products, while silver and cadmium are byproducts of value. Zinc finds application in the steel industry for corrosion protection and in the rubber industry for vulcanisation. Lead is primarily used to make lead-acid batteries and in the pigments and chemicals space. Silver is required for jewellery making and other industrial purposes. Apart from this, the company also produces concentrated sulphuric acid that is used to manufacture fertilizers and cement. The Group employs around 1,700 people.
Ambitious expansion plans
Management has a positive outlook for zinc demand for FY25 owing to rising steel demand in India, driven by significant infrastructure development, general expansion of manufacturing capacity and continued growth of construction activity. To meet this rising demand, Hindustan Zinc plans to almost double its annual metals capacity to 2mn Mt and increase silver capacity to 1kt.
Additionally, management is implementing several growth projects such as the new roaster at the Debari facility, which is expected to be commissioned by 4QFY25, adding an annual capacity of 160kt. They are also developing the next-generation zinc-based batteries in partnership with Jawaharlal Nehru Centre for Advanced Scientific Research, with plans to set up a zinc-based battery gigafactory in India. Further, the company is building a fertilizer plant at Chanderiya with an annual production capacity of 510kt, which will be completed by 2QFY26.
Recently, Hindustan Zinc extended its partnership with Serentica Renewables to increase total renewable energy purchases to 530MW, which will mean renewable energy sources will make up 70% of the company’s operational power requirements and reduce carbon emissions by 69%. The sustainability focus also helps reduce production costs, and the company is already in the first decile of the global zinc mining cost with the lowest smelting cost among the top global zinc smelters.
Solid results provide a positive light
Hindustan Zinc reported a revenue CAGR of 7.5% over FY15-24 to reach INR283bn. Despite the decent long-term performance, revenue growth has been volatile as the company is prone to the intrinsic volatility of the metals and mining sector. Revenues have fallen in FY16, FY19 and FY24 due to lower zinc and lead prices. Over the same period of FY15-24, National Aluminium Company has reported a lower average revenue growth of 6.6% with similar volatility.
1HFY25 revenues grew 16.4% YoY to INR163.8bn, helped by favourable metal volumes, and improved zinc and silver prices. EBITDA increased 25.1% YoY and margins expanded 345bps to 49.5%, on the back of higher production volumes and a 7% YoY cost reduction from better coal linkages and softer input commodity prices. NALCO demonstrated 10.2% YoY strong topline growth, indicating that the positive momentum was visible across the industry.
Hindustan Zinc’s dividend policy dictates a payment of at least the higher of 30% of profit after tax and 5% of opening net worth. Over the last five years, dividend payout has averaged around 100%, apart from FY23 when they had a significantly higher payout of 300%. In August 2024, the company paid a special dividend of INR80bn, because of which analysts expect the FY25 dividend payout to be INR34.9 per share, reflecting an attractive dividend yield of over 7.5%.
Moderate valuations compared to global peers
The company’s stock has performed well in the past twelve months, delivering solid returns of over 42%. The stock is currently trading at a P/E of 18.7x, below the global peer average of 24.4x, but expensive compared to the 10-year historical average of 12.6x. Hindustan Zinc is also expensive than its local mining peer, National Aluminium Company, which is trading at a P/E of 9.6x. Analysts’ estimates project the sales of the company to increase at a CAGR of 4.4% to INR370.5bn, projecting an encouraging outlook for the company.
Overall, the company is a compelling investment opportunity with its market-leading position and strong industry tailwinds. The zinc industry benefits from favourable conditions of the sustained demand-supply gap with Indian steel production expected to increase steadily driven by infrastructure and construction growth. Hindustan Zinc, as one of the lowest-cost zinc producers in the world, is in a strong position to capitalise from this growth. For this reason, management is implementing a plan to double the metals capacity to 2mn Mt and silver capacity to 1kt. On the other hand, operating performance is highly cyclical and geopolitical tensions or lower-than-expected industrial growth could negatively affect the company. Stake sales by major shareholders, which were witnessed recently could also be an overhang on the share price.