Fundamental Analysis of Hindustan Zinc

Fundamental Analysis of Hindustan Zinc - Cover Image

Fundamental Analysis of Hindustan Zinc: In recent months, the news has been filled with the proposed stake sale of the government in Hindustan Zinc Ltd. (HZL). It is said that big corporate events can result in attractive opportunities for investors. Can this be the case for HZL as well?

In this article, we’ll perform a fundamental analysis of Hindustan Zinc and attempt to understand where it stands today and what lies ahead for the company & its investors.

We’ll start our study of the company by learning about the business. Next, we’ll read about the different divisions of Hindustan Zinc followed by a quick overview of the industry. After that, we’ll race through the financials of the stock. A highlight of the future plans, present shareholding structure & proposed divestment plans and a summary conclude the article at the end.

Company Overview

Hindustan Zinc Ltd. (HZL) is one of the world’s largest integrated mining and resources companies. It was founded 57 years ago in 1966 as a public sector undertaking. Over the years, the Anil Agrawal-led Vedanta Group acquired the shareholding from the government as part of its privatisation plans.

As of the present date, HZL is the second-largest Zinc producer and fifth-largest Silver producer globally. It is a low-cost producer and fulfils nearly 80% of the Zinc demand in the nation making it a monopoly stock.

The miner owns 5 mines in Rajasthan with an annual ore production capacity of 16.7 million tonnes. Furthermore, Hindustan Zinc operates smelters at three different sites in Rajasthan and metal refineries in Uttarakhand with a capacity of 1.123 million tonnes.

In addition to its mining operations, it also owns captive thermal, solar and waste heat recycling power plants with a total capacity of 586.59 MW making it self-sufficient in energy requirements. And that’s not all. The company has a wind power generation capacity of 273.5 MW making it a key player in India’s renewable energy landscape.

We got a good overview of the business of the company. Let us look at various segments of the company for our fundamental analysis of Hindustan Zinc.

Business Segments

Zinc and Lead mining fetches a huge 84% of the total revenue for HZL. Silver sales brought some 13% of revenues for the company during the fiscal. The share of wind energy and other operating income is relatively small at only 0.4% and 2.4%.

The table below shows the share of different revenue segments of HZL.

Segments	FY22	FY23
Zinc, Lead & Others	82.9	84.3
Silver	14.3	12.9
Wind Energy	0.6	0.4
Other Op. Income	2.2	2.4

(figures in %)

Industry Overview

Zinc is primarily used for galvanizing steel and iron products to prevent their corrosion. Thus, the steel sector is the major consumer of Zinc driving its demand and giving a cyclical nature to the industry. Along with the steel sector, the coating industry and die-casting alloy industry also make use of Zinc.

The global zinc market is projected to grow at a significant rate and reach 1,012.23 thousand tons in volume by 2030. Higher demand for industrial and domestic uses will remain a key growth driver aided by housing and infrastructure development.

Thus, we can say that HZL is well-positioned as a monopoly leader in India’s Zinc landscape. The company will lead the growth of the sector in the coming years.

Hindustan Zinc – Financials

Revenue and Net Profit Growth

The revenues of Hindustan Zinc grew at a CAGR of 10% from Rs 21,118 crore in FY19 to Rs 34,098 crore in FY23. During the same period, its profit after tax increased at a slower pace of 5.73% (annualised) to Rs 10,511 crore.

The table below presents the operating revenue and net profit of HZL for the last five fiscals.

Financial Year	Operating Revenue	Net Profit
2023	34,098	10,511
2022	29,440	9,629
2021	22,629	7,980
2020	18,561	6,805
2019	21,118	7,956
5-Yr CAGR	10.06%	5.73%

(figures in Rs Cr except for CAGR)

To suit investors’ interests, profit should grow at a faster or the same pace as revenues. But this is not the case with the mining company here. Let us learn about this in the next section of our fundamental analysis.

Operating and Net Profit Margin

Over the last five years, the profit margins of the company shrank even though the company mined more and more resources. The price increase in metals has been slower than the concurrent rise in power and other costs.

We can learn from the figures below that the operating profit and net profit margins have come down marginally in recent years.

Financial Year	OPM	NPM
2023	46	31
2022	49	33
2021	48	35
2020	46	37
2019	50	38

(figures in %)

Return Ratios: RoE and RoCE

Historically, HZL exhibited strong return ratios: return on capital employed (RoCE) and return on equity (RoE). However, the company reported unusually high numbers in FY23. Did it earn stellar profits?

Not actually. The holding company of HZL has a heavy debt. To meet its obligations the board announced hefty dividends thereby depleting the reserves and surplus of HZL. As a result, the shareholders’ equity was reduced when the money in the form of dividends went out of the business. As a result, the return ratios of HZL spiked in the recent financial year.

The table below showcases the RoCE and RoE of Hindustan Zinc for the last five fiscal years.

Financial Year	RoCE	RoE
2023	87	81
2022	38	22
2021	29	17
2020	20	14
2019	30	19

(figures in %)

Debt Analysis of Hindustan Zinc

We read above in our fundamental analysis of Hindustan Zinc that a heavy dividend payout in FY23 reduced the equity base. Consequently, the debt-to-equity ratio increased to 0.92 from only 0.08 a year ago.

With an interest coverage ratio of 57, HZL is still a fundamentally strong stock giving it is in the mining industry with strong revenue visibility.

The table below presents the debt-to-equity ratio and interest coverage ratio of Hindustan Zinc for the last few financial years.

Financial Year	Debt / Equity	Interest Coverage
2023	0.92	57
2022	0.08	60
2021	0.22	35
2020	0.02	76
2019	0.08	94

Shareholding and Proposed Disinvestment

Presently, Anil Agarwal-led Vedant Group holds a majority 64.92% stake in Hindustan Zinc. The Government of India has another 29.54% of the company while the balance lies with FIIs, DIIs and the public.

In recent quarters, the Department of Investment and Public Asset Management (DIPAM), Government of India has been trying to offload the stake in HZL to meet the disinvestment targets.

The stake sale which was previously expected to go through in FY 2023 has been delayed to the present fiscal. The Vedanta Group is a key contender planning to buy acquire the additional stake from the government.

Future Plans Of Hindustan Zinc

So far we looked at previous fiscals’ data for our fundamental analysis of Hindustan Zinc. In this section, we’ll try to get a sense of what lies ahead for the company and its investors.

As of March 21 2023, HZL had total reserves and resources of 460.1 MT translating into a metal production life of over 25 years at the current mining pace.
The Q1FY24 period will record the commissioning of the zinc alloys plant and Rajpura Dariba Mill for the company resulting in higher sales in the coming quarters.
The management has plans to increase underground mines capacity to 1.35 MTPA. Further, it is eying to grow its production of silver from 800 MT to 1,000 MT making it one of the top three primary silver-producing companies across the globe.
Hindustan Zinc has earmarked a significant CAPEX of Rs 8,270 crore towards acquiring battery-operated vehicles for its mining operations and phasing out diesel-fired ones over the next five years.