By Nitin Bansal

India Ratings and Research (Ind-Ra) has assigned Hindustan Zinc Limited’s (HZL) commercial paper (CP) programme rating as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating

Rating Action

CP programme

-

-

7-365 days

INR20

IND A1+

Assigned

KEY RATING DRIVERS

Strong Liquidity Profile: The rating reflects HZL’s strong liquidity position with gross cash and cash equivalents of INR239.7 billion at FYE17 (FYE16: INR352.3 billion). Cash flow from operations increased to INR77 billion (FY16: INR69.5 billion) driven by higher prices of zinc (FY17: USD2,364/t, FY16: USD1,829/t), lead (USD2,003/t, USD1,768/t) and silver (USD17.9/oz, USD15.2/oz). Despite an increase in inventory days in FY17, the company’s cash balance remained strong due to high customer advances (FY17: INR15 billion, FY16: INR4.6 billion). The company had CP worth INR79.08 billion outstanding as of 31 March 2017. Ind-Ra expects HZL to continue reporting strong operating cash flows in FY18 driven by higher commodity prices, as well as higher production and sales volumes of zinc, lead and silver.

Dominant Market Position:
HZL runs an integrated zinc-lead-silver operation with zinc, lead and silver smelting capacity of 833,000tpa, 185,000tpa and 518tpa, respectively, through three plants along with captive power plants of 474MW. HZL is the largest zinc miner in India with a market share by volume of 70% and ranks second largest globally. The company’s dominant position stems from the integrated nature of its operations.

Increase in Volumes
: HZL is in the process of ramping up volume of mined metal (MIC) to 1.2mtpa by FY20 (FY17: 907,000tpa, FY16: 889,000tpa). However, despite an increase in MIC, refined zinc and lead volumes declined during FY17 to 670,000tpa (FY16: 759,000tpa) and 139,000tpa (145,000tpa), respectively, as HZL had lower MIC availability in 1HFY17 due to the cyclical pattern of the Rampur Agucha open cast mines. HZL is transitioning to an underground mine operations at Rampur Agucha from open cast with share of MIC from underground increasing to 52% in FY17 (FY16: 41%); the share is likely to increase further to 75% in FY18 and 100% by FY19. Higher share from Sindersar Khurd mines should lead to better silver output as these mines are rich in silver content.

Low Cost of Production:
HZL is in the first quartile composite cost of production (CoP) globally, given the fully integrated nature of operations. During FY17, the CoP excluding royalty increased to USD830/t (FY16: USD804/t)   due to lower integrated production, higher coal and input commodity prices, lower average grades due to change in mining mix and lower by-product credit. HZL expects the CoP to increase marginally on account of increasing coal and input commodity prices. HZL plans to incur capex of USD350 million-360 million in FY18 towards ongoing mining expansion, smelter debottlenecking and fumer project.

Healthy Reserve Life:
HZL’s overall reserves and resources (R&R) increased to 404mmt in FY17 (FY11: 313mmt) ensuring a long-term mine life of more than 25 years. Of this, 109mMT is reserve base and 295.3mMT resource base. HZL had ore production of 11.9mMT in FY17 (FY16: 10.5mMT) primarily owing to higher production from Sindersar Khurd (FY17: 3.7mMT, FY16: 3.0mMT) and Zawar (1.8mMT, 1.4mMT) mines, while output from the Rampur Agucha mines was maintained at 4.7mMT.


Large Dividends Lead to Lower Cash:
The government of India holds 29.54% in HZL. During FY17, the company declared a substantial dividend of INR149.5 billion including dividend distribution tax, resulting in reduction in the cash balances to INR239.7 billion at 4QFYE17 and INR239.6 billion at 1QFYE18. Any further continued higher dividends could result in cash balances to decline.

Demand Supply Mismatch in Zinc Markets:
The demand supply imbalance in the zinc markets has led to rallying of zinc prices. As per Wood Mackenzie research report, the demand for zinc is likely to grow 2% in 2017 and the supply is likely to grow 1%. The zinc markets would continue to remain in deficit, and hence the prices are likely to remain firm.

Domestic Dependence:
During FY17, HZL derived 68% of its zinc revenue from domestic sales with a bulk of the sales directed towards galvanisation purposes. Any downturn in the demand for steel driven by lower demand from end-consumers of steel namely automobiles, infrastructure and real estate companies could lead to lower zinc demand. This would result in HZL to rely on additional export volumes incrementally as the refined zinc volumes ramp up.


RATING SENSITIVITIES

The company has adequate liquidity buffers in the form of significant cash balances and strong operating cash flows given its low cost of production. Therefore, any rating downgrade is highly unlikely.


COMPANY PROFILE

HZL is a Vedanta Group company engaged in zinc, lead and silver business.

FINANCIAL SUMMARY

Particulars

FY17

FY16

Revenue (INR million)*

172,730

141,810

EBITDA (INR million)

97,390

66,520

EBITDA margin (%)

56.4

46.9

Interest expenses (INR million)

2,020

170

Source: Ind-Ra, HZL

* Net of excise duty




COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators. 

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Nitin Bansal

    Senior Analyst
    India Ratings & Research A Fitch Group Company 601, Prakashdeep Building 7, Tolstoy Marg New Delhi 110001 India
    +91 11 43567230

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121