Rating Rationale
October 29, 2021 | Mumbai
Hindustan Zinc Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.2750 Crore (Reduced from Rs.4400 Crore)
Long Term RatingCRISIL AAA/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
 
Rs.8500 Crore Non Convertible DebenturesCRISIL AAA/Stable (Reaffirmed)
Rs.7500 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

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 dominant position of the company 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.

 

Ramp-up in volume; recovery in zinc, lead and silver prices from the second quarter of fiscal 2021; and reduced cost of production supported increased earnings before interest, tax, depreciation and amortisation (Ebitda; Rs 11,739 crore in 2021 against Rs 8,849 crore in 2020). Furthermore, healthy commodity prices during the first-half of the current fiscal (average zinc and lead London Metal Exchange [LME] prices rose by 37% and 26%, respectively, during the first-half of fiscal 2022 on year-on-year basis) along with improved mined metal production (470 kilo tonnes [KT] against 440 KT in the first-half of fiscal 2021) resulted in strong Ebitda of Rs 6,890 crore (Rs 4,551 crore in the first-half of fiscal 2021). This, despite increase in cost of production due to higher input cost and maintenance shutdown.

 

CRISIL Ratings has withdrawn its rating on the bank facilities of Rs 1,650 crore on receiving confirmation from the bank and HZL. The rating is withdrawn in line with CRISIL Ratings’ rating withdrawal policy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 a 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 a market share of over 75% by volume, it enjoys leadership position in the domestic zinc market. High entry barrier such as capital-intensive operations and lack of zinc ore mines lend a competitive edge to 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 reserves leading to competitive cost position: HZL’s 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 reserves. 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 23,662 crore as on September 30, 2021. However, backed by healthy cash accruals, 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 15,972 crore in fiscal 2021. It had outstanding debt of Rs 4,559 crore as on September 30, 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 last fiscal. 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: HZL faces high concentration risk in its business profile, 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 23,662 crore as on September 30, 2021. The company had long-term debt of Rs 2,813 crore and short term debt of Rs 1,746 crore as on September 30, 2021, mainly raised for capex and meeting temporary cash flow mismatch on account of dividend payments in the last fiscal. It has prepaid Rs 1,500 crore of rupee term loan 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 given the robust cash accrual.

Outlook: Stable

HZL will maintain its favourable capital structure and strong liquidity over the medium term, driven by its 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
  • Significant increase in cost of production, including royalty payout, lowering profitability and adversely impacting business risk profile

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 (Sterlite Industries), which later made an open offer for an additional 20%. In fiscal 2004, Sterlite Industries 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-/Positive/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-half of fiscal 2022, HZL reported revenue of Rs 12,653 crore and net profit of Rs 4,000 crore, against Rs 9,649 crore and Rs 3,299 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

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of instrument

Date of allotment

Coupon

rate (%)

Maturity

date

Issue size

(Rs crore)

Complexity

level

Rating assigned

with outlook

NA

Commercial Paper

NA

NA

7-365 days

7500

Simple

CRISIL A1+

NA

Fund-Based Facilities

NA

NA

NA

50

NA

CRISIL AAA/Stable

NA

Letter of Credit^

NA

NA

NA

500

NA

CRISIL A1+

NA

Letter of Credit^^

NA

NA

NA

650

NA

CRISIL A1+

NA

Cash Credit#

NA

NA

NA

700

NA

CRISIL AAA/Stable

NA

Overdraft Facility

NA

NA

NA

100

NA

CRISIL AAA/Stable

NA

Overdraft Facility *

NA

NA

NA

500

NA

CRISIL AAA/Stable

NA

Standby Letter of Credit@

NA

NA

NA

250

NA

CRISIL AAA/Stable 

INE267A08012

Debentures

29-Sep-20

5.35%

29-Sep-23

3520

Simple

CRISIL AAA/Stable

NA

Debentures%

NA

NA

NA

4980

NA

CRISIL AAA/Stable

NA

Bill Discounting

NA

NA

NA

50

NA

Withdrawn

NA

Rupee Term Loan

11-Aug-20

NA

11-Nov-22

1500

NA

Withdrawn

NA

Overdraft Facility

NA

NA

NA

100

NA

Withdrawn

#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 standby letter of credit (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

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 3000.0 CRISIL AAA/Stable   -- 09-11-20 CRISIL AAA/Stable 22-02-19 CRISIL A1+ / CRISIL AAA/Stable 24-10-18 CRISIL A1+ / CRISIL AAA/Stable CRISIL A1+ / CRISIL AAA/Stable
      --   -- 18-06-20 CRISIL AAA/Stable   -- 23-03-18 CRISIL A1+ / CRISIL AAA/Stable --
      --   -- 08-01-20 CRISIL A1+ / CRISIL AAA/Stable   -- 12-03-18 CRISIL A1+ / CRISIL AAA/Stable --
Non-Fund Based Facilities LT/ST 1400.0 CRISIL A1+ / CRISIL AAA/Stable   -- 09-11-20 CRISIL A1+ / CRISIL AAA/Stable 22-02-19 CRISIL A1+ 24-10-18 CRISIL A1+ CRISIL A1+
      --   -- 18-06-20 CRISIL A1+ / CRISIL AAA/Stable   -- 23-03-18 CRISIL A1+ --
      --   -- 08-01-20 CRISIL A1+   -- 12-03-18 CRISIL A1+ / CRISIL AAA/Stable --
Commercial Paper ST 7500.0 CRISIL A1+   -- 09-11-20 CRISIL A1+ 22-02-19 CRISIL A1+ 24-10-18 CRISIL A1+ CRISIL A1+
      --   -- 18-06-20 CRISIL A1+   -- 23-03-18 CRISIL A1+ --
      --   -- 08-01-20 CRISIL A1+   -- 12-03-18 CRISIL A1+ --
Non Convertible Debentures LT 8500.0 CRISIL AAA/Stable   -- 09-11-20 CRISIL AAA/Stable   --   -- --
      --   -- 18-06-20 CRISIL AAA/Stable   --   -- --
Short Term Debt ST   --   --   --   --   -- Withdrawn
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Rating
Bill Discounting 50 Withdrawn
Cash Credit# 700 CRISIL AAA/Stable
Fund-Based Facilities 50 CRISIL AAA/Stable
Letter of Credit^ 500 CRISIL A1+
Letter of Credit^^ 650 CRISIL A1+
Overdraft Facility 100 Withdrawn
Overdraft Facility 100 CRISIL AAA/Stable
Overdraft Facility* 500 CRISIL AAA/Stable
Rupee Term Loan 1500 Withdrawn
Standby Letter of Credit@ 250 CRISIL AAA/Stable

#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 standby letter of credit (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

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Mining Industry
CRISILs Criteria for rating short term debt

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