Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the bank facilities and debt programmes of Hindustan Zinc Ltd (HZL).

 

The ratings continue to reflect the dominant position of HZL in the domestic zinc market, efficient and integrated operations, and strong financial risk profile. These strengths are partially offset by susceptibility to cyclicality in the galvanised steel sector and exposure to geographical and product concentration in revenue.

 

Elevated commodity prices during fiscal 2022 (average zinc and lead London Metal Exchange [LME] prices rose by 34% and 25%, respectively, during the first nine months of fiscal 2022 on year-on-year basis) along with improved mined metal production of 722 kilo tonne (KT0 (against 684 KT in the first nine months of fiscal 2021) led to strong reported earnings before interest, taxes, depreciation, and amortization (Ebitda) of Rs 11,282 crore (Rs 7,865 crore in the nine months of fiscal 2021). This, despite increase in cost of production due to higher input cost and maintenance shutdown.

Key Rating Drivers & Detailed Description

Strengths

Dominant position in the domestic zinc market

The company has mined metal capacity of around 1.2 million tonne per annum (tpa) and smelter capacities of 913,000 tpa for zinc, 210,000 tpa for lead, and 800 tpa for silver. It is the second-largest zinc-lead miner and fourth-largest zinc-lead smelter globally. With market share of over 75% by volume, it enjoys leadership position in the domestic zinc market. High entry barriers such as capital-intensive operations and lack of zinc ore mines lend a competitive edge to the business risk profile. Presence in the global market also enhances revenue diversity; in fiscal 2021, export accounted for around 26% of turnover.

 

Integrated operations and high-grade reserve, leading to competitive cost position

Cost of production ranks in the first quartile globally (zinc metal cost, excluding royalty, was USD 954 per tonne in fiscal 2021, down from USD 1,047 per tonne in fiscal 2020). High operating efficiency is driven by fully integrated operations (with captive power plant capacity of 485.5 megawatt) and low-cost, high-grade zinc reserve. As on March 31, 2021, net reserve and resources were 448 million tonne, ensuring a long mine life of over 25 years. With access to bulk of lead-zinc deposits in Rajasthan through long-term agreements with the Government of India, the company should be able to sustain as a low-cost producer of zinc over the medium term.

 

Strong financial risk profile, driven by high liquidity and conservative capital structure

Financial risk profile is supported by large networth and strong liquid surplus. Cash and equivalent stood at Rs 17,040 crore as on December 31, 2021. However, backed by healthy cash accrual, dividend payouts are generally high in order to increase shareholders’ return as well as to support debt at Vedanta Resources Ltd (VRL; ultimate parent company of HZL). HZL paid dividend of Rs 7,606 crore during the first nine months of fiscal 2022 and Rs 15,972 crore in fiscal 2021. It had outstanding debt of Rs 2,814 crore as on December 31, 2021 (Rs 7,178 crore as on March 31, 2021), raised to fund capital expenditure (capex) and meet temporary cash flow mismatches on account of dividend payouts in fiscal 2021. Despite this, financial metrics should remain healthy over the medium term because of high profitability.

 

Weaknesses

Exposure to cyclicality in the galvanised steel sector

Demand for zinc is closely linked to the galvanised steel industry, which consumes around 70% of the zinc produced in India. The steel industry depends on the growth of end-user segments such as automotive, consumer durables, batteries, home appliances, construction and infrastructure. A downturn in any of these will reduce demand for galvanised steel. Zinc also faces competition from substitutes such as aluminium and other alloys to produce galvanised steel. Furthermore, exposure to LME zinc and lead prices can lead to volatility in Ebitda.

 

Exposure to regulations and concentration risk

Concentration risk is likely to remain high as the zinc-lead business accounts for more than 75% of revenue and profitability. The company also faces regulatory risks as the entire business (all mines) is concentrated in Rajasthan. Royalty cost per tonne of mined metal has increased by more than 125% during the past six years.

Liquidity: Superior

Cash and liquid investment stood at about Rs 17,040 crore as on December 31, 2021. The company had outstanding debt of Rs 2,814 crore as on December 31, 2021, mainly raised for capex and meeting temporary cash flow mismatch on account of dividend payments in fiscal 2021. It has repaid Rs 4,364 crore of debt during YTD-fiscal 2022, supported by strong cash accrual. Although, dividend cash outflow could remain high (to increase shareholders’ return as well as due to continued assistance towards VRL’s debt obligation), overall liquidity will remain strong owing to robust cash accrual.

 

Environment, social, and governance (ESG) profile

CRISIL Ratings believes the ESG profile of HZL supports its already strong credit risk profile.

 

The zinc manufacturing sector has a significant impact on the environment owing to high emissions, waste generation and water consumption. This is because of energy intensive metal & mining process and its high dependence on natural resources such as zinc ore, coal as key raw materials. The sector also has a significant social impact because of its large workforce across operations and value chain partners, and also due to its nature of operations affecting local community and health hazards involved. HZL has been focusing on mitigating its environmental and social risks.

 

Key ESG highlights

• HZL is focusing on reducing the carbon footprint in its entire production process. It aims 10% (0.5 MN tCO2e) reduction in greenhouse gas (GHG) emissions by 2025 over base of fiscal 2017.
• HZL aims to become 5 times water positive company as against 2.41 times in the base year 2020. The company is also targeting 25% reduction in freshwater usage.
• Its loss time injury frequency rate of 0.97 is on lower side as compared with 1.4 in fiscal 2020, representing strong human capital management. The company targets 50% reduction in total recordable injury frequency rate by 2025.
• HZL’s governance structure is characterised by 25% of its board comprising independent directors (none of them having tenure exceeding 10 years), three nominees of Government of India (strong minority shareholder in the company), chairman and CEO positions being split, dedicated investor grievance redressal mechanism and healthy disclosures
• HZL is a part of the Vedanta group, which has set following group level targets –

1. Aim to become carbon neutral by 2050 or sooner, including reducing the GHG emissions intensity by 20% by 2025 from 2012 baseline
2. Target to achieve net water positivity by 2030 and zero net waste by 2025
3. Zero social incidents category 4 & above
4. Skilling & employability creation for 60,000 youths by 2025
5. 20% women in workforce by 2030, form gender diversity of 11.2% in fiscal 2021

 

There is growing importance of ESG among investors and lenders. HZL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to capital markets, primarily domestic.

Outlook: Stable

HZL will continue to benefit from its favourable capital structure and strong liquidity, driven by dominant position in the domestic market, high cash flow from the core business, and efficient and integrated operations.

About the Company

HZL was incorporated in 1966 as a public sector company. In fiscal 2003, the government divested 26% of its equity in HZL to Sterlite Industries Ltd, which later made an open offer for an additional 20%. In fiscal 2004, Sterlite Industries Ltd acquired an additional 18.92% stake by exercising an option granted by the government to increase its stake to 64.9%. After the restructuring of the Vedanta group in India, HZL became a 64.9% subsidiary of Vedanta Ltd ('CRISIL AA/Stable/CRISIL A1+'). Based in Udaipur, Rajasthan, HZL has zinc and lead mines in Rampura Agucha, Sindesar Khurd, Rajpura Dariba, Zawar and Kayad; primary smelter operations at Chanderiya, Dariba and Debari (all in Rajasthan); and finished product facilities in Uttarakhand.

 

In the first nine months of fiscal 2022, HZL reported revenue of Rs 20,643 crore and net profit of Rs 6,701 crore, against Rs 15,682 crore and Rs 5,499 crore, respectively, for the corresponding period previous fiscal.

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs crore	22,629	18,561
Profit after tax (PAT)	Rs crore	7,980	6,805
PAT margin	%	35.1%	36.5%
Adjusted debt /adjusted networth	Times	0.22	0.02
Interest coverage	Times	35.1	92.2

Any other information: Not applicable

Annexure - Details of Instrument(s)

#Sublimit of bill discounting facility of Rs 700 crore, export packing credit (EPC) of Rs 500 crore and foreign usance bills of Rs 500 crore

^Sublimit of SBLC of Rs 500 crore and bank guarantee (BG) of Rs 150 crore

^^Sublimit of BG of Rs 400 crore

@Sublimit of letter of credit (LC) of Rs 250 crore

*Sublimit of EPC/bill discounting/PCFC/BG/LC/working capital demand loan (WCDL)/short-term loan (STL) limit of Rs 500 crore

%Yet to be placed