Detailed Rationale

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

 

The ratings continue to reflect the company’s dominant position 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 geographical and product concentration in revenue.

 

Despite moderation in prices during H1 of fiscal 2024, HZL has reported healthy operating profitability on the back of lower cost of production, robust production rates, and mined metal production of 509 kilo tonne (KT; against 507 KT in H1 fiscal 2023).

 

Commodity prices have moderated since fiscal 2023 amid global macro headwinds and fear of lower-than-expected Chinese demand growth but continues to remain robust. This, coupled with efficient cost of production along with expected easing of energy prices due to reduction in domestic power cost post monsoon, should support the company in witnessing healthy operating accrual going ahead, and the same will remain key monitorable.

 

CRISIL Ratings also notes the announcement by HZL (dated September 29, 2023) wherein HZL’s board had authorized a committee of directors to undertake a comprehensive review of its corporate structure for unlocking potential value by creating separate legal entities for Zinc & Lead, Silver, and Recycling business of the company. However, CRISIL Ratings understands the proposal is currently in nascent stage and no decision is taken by the company’s board on any such transaction. Further, contours of the transaction including the potential capital structure of entities along with allocation of assets and liabilities between the proposed entities will be critical to assess the potential implication of the transaction. CRISIL Ratings will, however, continue to monitor the developments on this front.

 

CRISIL Ratings notes that the capital structure of HZL has strengthened and HZL has turned net cash (total cash minus total debt) positive with net cash of around Rs 70 crore as on Sep 30, 2023 as compared to net debt (total debt minus total cash) positive with net debt of around Rs 1,780 crore as on March 31, 2023. Further, financial metrics are expected to remain strong over the medium term because of healthy operating profitability and cash accruals. Further, rating factors in the sustenance of the balance-sheet strength with continued net cash position and increase in net-worth by retention of operating earnings, supporting reduction in gearing from current levels, will remain key rating sensitivity factors.

 

CRISIL Ratings has also withdrawn its rating on the Non-Convertible Debentures (NCDs) of Rs 2112 crore on receiving redemption confirmation from the debenture trustee and commercial paper of Rs 1888 crore on receiving request from the company as the same was unutilized. The ratings are withdrawn in line with CRISIL Ratings’ rating withdrawal policy.

Key Rating Drivers & Detailed Description

Strengths:

• Dominant position in the domestic zinc market

The company has mined metal capacity of around 1.2 MTPA 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 a market share of around 80% by volume, it enjoys leading 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. Also, presence in the global market enhances revenue diversity; in fiscal 2023, export accounted for around 29% of turnover.

 

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

Despite increase in cost of production, mainly due to higher energy prices, the cost of production for HZL ranks in the first quartile globally (zinc metal cost, excluding royalty, was USD 1,167 per tonne in H1 fiscal 2024, down from USD 1,260 per tonne in H1 fiscal 2023). Operating efficiency is high, driven by fully integrated operations (with captive power plant capacity of 485.5 MW) and low-cost, high-grade zinc reserve. As on March 31, 2023, total reserve and resources were 460 million tonnes (MT), ensuring 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 healthy liquidity and conservative capital structure

The financial risk profile is supported by high net-worth and strong liquid surplus. Cash and equivalent stood at Rs 11,393 crore as on September 30, 2023 (Rs 10,061 crore as on March 31, 2023). 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 announced a dividend of around Rs 2,958 crore in Q1 of fiscal 2024 (Rs 31,901 crore in fiscal 2023 and Rs 7,606 crore in fiscal 2022). It had outstanding debt of Rs 11,323 crore as on September 30, 2023 (Rs 11,841 crore as on March 31, 2023 and Rs 2,823 crore as on March 31, 2022), raised to fund capital expenditure (capex) and meet temporary cash flow mismatches on account of dividend payouts during past fiscals. However, despite the same, financial metrics remains strong and are expected to remain strong over the medium term because of healthy operating profitability and cash accruals. Sustenance of the same will be key monitorable.

 

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. Downturns in any of the end-user segments will reduce demand for galvanised steel. Moreover, zinc faces threat of substitution with aluminium and other alloys to produce galvanised steel. Furthermore, fluctuations in London Metal Exchange (LME) zinc and lead prices can lead to volatility in EBITDA.

 

• Exposure to regulatory and concentration risks

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

Liquidity: Superior

Cash and liquid investment stood at Rs 11,393 crore as on September 30, 2023 (Rs 10,061 crore as on March 31, 2023). The company had outstanding debt of Rs 11,323 crore as on September 30, 2023 (Rs 11,841 crore as on March 31, 2023). Although dividend cash outflow remained high (to increase shareholders’ return and continued assistance towards Vedanta Resources Ltd.’s debt obligation), overall liquidity is expected to remain strong owing to robust cash accrual.

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes the ESG profile of HZL supports its 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 and mining process and its high dependence on natural resources such as zinc ore and 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 impact of operations on 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 of its production process. It is aiming for 10% (0.5 MN tCO2e) reduction in greenhouse gas (GHG) emissions by 2025 over base of fiscal 2017.
• The company aims to become 5 times water-positive, as against 2.4 times in 2020. The company is also targeting 25% reduction in freshwater usage.
• Its total recordable injury frequency rate (TRIFR) frequency rate of 1.9 is lower than 2.7 in fiscal 2020, representing strong human capital management. The company targets 50% reduction in TRIFR by 2025.
• Around 25% of the board comprises independent directors (none of them having tenure exceeding 10 years), three nominees of government of India (strong minority shareholder), split chairman and CEO positions, dedicated investor grievance redressal mechanism and healthy disclosures.

 

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 borrowing in overall debt and access to capital markets, primarily domestic.

Outlook: Stable

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

Rating Sensitivity factors

Downward factors:

• Sustained negative free cash flow, leading to net debt* position on continued basis
• Significant increase in cost of production, including royalty payout, lowering profitability and adversely impacting business risk profile

 

*Total debt – total cash more than 0

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 restructuring of the Vedanta group in India, HZL became a 64.9% subsidiary of Vedanta Ltd ('CRISIL AA-/ CRISIL A1+/Rating watch with developing implications'). Based in Udaipur, Rajasthan, HZL has zinc and lead mines in Rampura Agucha, Sindesar Khurd, Rajpura Dariba, Zawar, Kawad and Bamnia Kalan mines; primary smelter operations in Chanderiya, Dariba and Debari (all in Rajasthan); and finished product facilities in Uttarakhand.

Key Financial Indicators (CRISIL Ratings – adjusted number)

Particulars	Unit	2023	2022
Revenue	Rs crore	34,255	29,440
Profit after tax (PAT)	Rs crore	10,520	9,630
PAT margin	%	30.7	32.7
Adjusted debt / adjusted net-worth	Times	0.95	0.08
Interest coverage	Times	58.0	59.1

 

Any other information: Not applicable