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 geographic and product concentration in revenue.

 

Despite moderation in prices in fiscal 2024, HZL reported healthy operating profitability backed by reducing cost of production, robust production and mined metal production of 1,079 kilotonne (KT; as against 1,062 KT in fiscal 2023) in fiscal 2024, which is the highest ever.

 

Commodity prices have been robust this year amid expected improvement in global demand, including China, and lower metal inventory. This, coupled with efficient cost of production and easing energy prices due to reduction in domestic power cost, should support healthy operating profitability and the same will remain a key monitorable. In the first quarter of fiscal 2025, HZL has reported earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 3,950 crore, which is 18% higher on-year basis.

 

Also, CRISIL Ratings has taken note of the dividend announced by HZL in fiscal 2025 (dividend of ~Rs 12,253 crore in the first half of the fiscal, as against Rs 5,493 crore in full fiscal 2024), including the second interim dividend announced in August 2024. CRISIL Ratings understands that majority of the dividend and ongoing capital expenditure (capex) will be funded by internal accrual in fiscal 2025. However, owing to increased dividend outflow, debt is expected to increase, and the company is likely to become net debt (total debt minus total cash and equivalent) positive as on March 31, 2025, compared with net cash (total cash and equivalent minus total debt) positive position of around Rs 1,729 crore as on March 31, 2024. However, despite the said increase in debt, the capital structure remains strong as the net leverage (ratio of net debt to Ebitda) will be very low, cash accruals remain strong, and liquidity remains high. Further, CRISIL Ratings expects that dividend outflow to be materially lower from next fiscal, while operating cash accrual will remain strong with annual Ebitda of more than Rs 15,000 crore. CRISIL Ratings expects the company to become net cash-positive next fiscal along with strong capital structure and liquidity profile on a sustainable basis. Any deviation from this understanding will be a key rating monitorable.

 

CRISIL Ratings also notes the intent of the company’s management to evaluate possibilities of demerger of HZL into multiple entities. However, nothing is final yet and no decision has been taken by the company’s board on any transaction. Further, contours of the transaction including the capital structure of the entities along with allocation of assets and liabilities between the proposed entities will be critical to assess the impact of the transaction. CRISIL Ratings will, however, continue to monitor developments on this front.

 

Also, CRISIL Ratings has withdrawn its rating on the proposed non-convertible debentures (NCDs) of Rs 455 crore at the company’s request as the NCDs were unutilised. The rating is withdrawn in line with the CRISIL Ratings withdrawal policy.

Analytical Approach

CRISIL Ratings has evaluated the standalone business and financial risk profiles of HZL.

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 is the leading player 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 2024, export accounted for around 23% of the turnover.

 

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

The cost of production for HZL ranks in the first quartile globally (zinc metal cost, excluding royalty, was USD 1,107 per tonne in the first quarter of fiscal 2025, down from USD 1,117 per tonne in fiscal 2024 and USD 1,257 in fiscal 2023). Operating efficiency was high, driven by fully integrated operations (with captive power plant capacity of 514 MW) and low-cost, high-grade zinc reserve. As on March 31, 2024, total reserve and resources were 456.3 MT, ensuring long mine life of over 25 years. With access to bulk of the 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 networth and strong liquid surplus. Cash and equivalent stood at Rs 10,885 crore as on June 30, 2024 (Rs 10,185 crore as on March 31, 2024). However, backed by healthy cash accrual, dividend payout is generally large to increase shareholders’ return as well as to support debt at Vedanta Resources Ltd (VRL; the ultimate parent of HZL). HZL has announced dividend of around Rs 12,253 crore in the first half of fiscal 2025 (Rs 5,493 crore in fiscal 2024 and Rs 31,901 crore in fiscal 2023). It had debt of Rs 11,178 crore as on June 30, 2024 (Rs 8,456 crore as on March 31, 2024, and Rs 11,841 crore as on March 31, 2023), raised to fund capex and meet temporary cash flow mismatch on account of dividend payouts in past fiscals. However, the financial metrics are expected to remain strong over the medium term because of healthy operating profitability and cash accrual. Sustenance of the same will be 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 these 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 business accounts for more than 75% of revenue and profitability. The company faces regulatory risks as the business (all mines) is concentrated in Rajasthan. Also, royalty cost per tonne of mined metal has increased by more than 125% in the past six years.

Liquidity: Superior

Cash and liquid investments stood at Rs 10,885 crore as on June 30, 2024 (Rs 10,185 crore as on March 31, 2024). The company had debt of Rs 11,178 crore as on June 30, 2024 (Rs 8,456 crore as on March 31, 2024). Although dividend outflow remained high (to increase shareholders’ return and continued assistance towards VRL’s debt obligation), 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 the 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 targeting 10% (0.5 MN tCO2e) reduction in greenhouse gas (GHG) emissions by 2025 over a base of fiscal 2017.
• The company aims to become 5 times water-positive, as against 2.4 times in 2020. It is also targeting 25% reduction in freshwater usage.
• Its total recordable injury frequency rate (TRIFR) of 1.84 is lower than 2.7 in fiscal 2020, representing strong human capital management. The company targets 50% reduction in TRIFR by 2025.
• Around 33% of the board comprises independent directors (none of them having tenure exceeding 10 years), three nominees of government of India (strong minority shareholder), split in 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 material net debt* position on a continued basis
• Significant increase in cost of production, including royalty payout, lowering profitability and adversely impacting the business risk profile

 

*Total debt minus 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 the restructuring of the Vedanta group in India, HZL became a 64.9% subsidiary of Vedanta Ltd ('CRISIL AA-/CRISIL A1+/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 numbers)

Particulars	Unit	2024	2023	2022
Revenue	Rs crore	29,113	34,255	29,440
Profit after tax (PAT)	Rs crore	7,787	10,520	9,630
PAT margin	%	26.7	30.7	32.7
Adjusted debt / adjusted networth	Times	0.59	0.95	0.08
Interest coverage	Times	15.59	58.0	59.1

 

Any other information: Not applicable