By Mahaveer Jain

India Ratings and Research (Ind-Ra) has affirmed the rating on Hindustan Zinc Limited’s commercial paper (CP) as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating

Rating Action

CP

-

-

7 to 365 days

INR30

IND A1+

Assigned

CP

-

-

7 to 365 days

INR20

IND A1+

Affirmed

The CP proceeds will be used for fulfilling general corporate purposes.

KEY RATING DRIVERS

Strong Liquidity Profile: HZL posted a strong cash flow from operations of INR124 billion in FY18 (FY17: INR77 billion), driven by a 21% yoy increase in zinc prices and robust volume growth in lead, zinc and silver. Ind-Ra expects HZL to continue reporting strong operating cash flows in FY19 but it will be lower than that in FY18, due to a correction in commodity prices and increasing cost pressures. HZL’s capital allocation continues to be weighted by dividends and growth capex. However, HZL continues to be in a net cash position with a high cash and equivalent balance of INR233 billion at end-1HFY19 (FY18: INR222 billion). 

Dominant Market Position:
 HZL runs integrated zinc-lead-silver operations 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 in total. HZL is the largest zinc miner in India with a market share by volume of 70% and ranks second largest globally, according to the management. The company’s dominant position stems from the integrated nature of its operations. 

Increase in Volumes
: HZL is ramping up the volume of mined metal to 1.2mtpa by FY20 (FY18: 960,000t, FY17: 907,000t). HZL has transitioned into underground mine operations at Rampur Agucha from open cast with the share of mined metal from underground increasing to about two-thirds in FY18. The share is likely to increase further to 100% in FY19. 

Low Cost of Production:
 HZL is in the first quartile composite cost of production globally, given the fully integrated nature of operations, according to the management. In 1HFY19, the cost was 6% yoy higher (13% in INR) at USD1,039 (INR71,211). The increase was primarily on account of a lower volume, higher mine development and a steep increase in input price. HZL plans to incur a capex of around USD450 million in FY19, towards ongoing mining expansion, smelter debottlenecking and fumer project. 

Healthy Reserve Life:
 HZL’s overall reserves and resources increased to 411mmt in FY18 (FY11: 404mmt), ensuring a long-term mine life of over 25 years. HZL produced 12.6mmt of ore in FY18 (FY17: 11.9mmt, FY16: 10.5mmt), supported by a 27% increase in ore production from underground mines.

Prices Correction in Zinc Likely to Continue:
Zinc prices have come down at a higher-than-expected pace during FY19, after rising steadily in FY17 and FY18 due to a shortage in supply. Ind-Ra expects further tapering of zinc prices during 2HFY19 on back of an increase in global supply. However, domestic zinc consumption is likely to remain firm, with a strong demand from key end-user industries such as automobile and construction. Also, HZL will continue to benefit from steady local premiums, weak rupee and benefit from operating leverage with increase in volumes, given the near-monopolistic situation. 

Domestic Dependence:
 During FY18, HZL derived 65% of its zinc revenue from domestic sales with bulk of the sales directed towards galvanisation purposes. Any downturn in the domestic demand for steel, driven by a lower demand from end-consumers namely automobiles, infrastructure and real estate companies, could lead to a 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 mining and smelting of zinc, lead and silver. 

FINANCIAL SUMMARY
 

Particulars

FY18

FY17

Revenue (INR million)*

225,210

187,980

EBITDA (INR million)

122,720

97,390

EBITDA margin (%)

54

52

Adjusted net debt (cash) (INR million)

-221,860

-242,550

EBITDA interest coverage (x)

43

48

Source: Ind-Ra, HZL

*Net of excise duty


RATING HISTORY

Instrument Type

Current Rating

Historical Rating

Rating Type

Rated Limits (billion)

Current Rating

18 October 2017

CP

Short term

INR50

IND A1+

IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, visit 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.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Mahaveer Jain

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001768

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121