By Mahaveer Jain

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

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

CP programme

-

-

7-365 days

INR50,000

IND A1+

Affirmed

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

 

Analytical Approach: Ind-Ra continues to take a consolidated view of Vedanta Limited ('IND AA'/Stable) and HZL and uplift the rating for a stronger business and financial profile compared to Vedanta.
 

KEY RATING DRIVERS

Dominant Market Position: HZL runs integrated zinc-lead-silver operations. It has a zinc, lead and silver smelting capacity of 843,000 tonnes per annum (tpa), 201,000tpa and 600tpa, respectively, at operations at three locations. In addition, it has a captive power plant capacity of 474MW. HZL is the largest zinc miner in India, with a market share by sales volume of about 79.3% and ranks the second-largest globally by production, according to the management. The company’s operations are integrated from mining to smelting. 

Healthy Reserve Life: HZL’s overall reserves and resources increased to 411 million metric tons (mmt) in FY18 (FY11: 404mmt), ensuring a long-term mine life of over 25 years. HZL produced 13.8mmt of zinc-lead ore in FY18 (FY17: 11.9mmt; FY16: 10.5mmt), supported by a 27% increase in zinc-lead ore production from underground mines. Considering only reserves, the mine life is about nine years at a run rate of 1 million tpa of metal. HZL plans to incur a capex of USD300 million-350 million in FY20 on an ongoing mining expansion, smelter debottlenecking and resource exploration.

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.  The agency expects HZL’s cost of production to soften in FY20 and FY21 in view of a rise in sales volume and a decline in raw material prices. In 9MFY19, cost of production (excluding royalties) rose 11% yoy to INR71,442 led by an increase in expenses related to mine development and a rise in raw material input prices. 

Increase in Volumes: HZL plans to ramp up the production capacity of mined metals to 1.2 million tpa by FYE20 (FYE18: 0.96 million tpa; FY17: 0.90 million tpa). HZL has transitioned into underground mine operations at Rampura Agucha from open cast, with the share of mined metals from underground increasing to about 76% in FY18. The share further increased to 100% in FY19. Although underground mining cost is higher than open pit mining cost, the cost position of HZL would remain competitive in view of high grades at Rampura Agucha.

Prices Correction in Zinc Likely to Continue: Zinc prices came down at a higher-than-expected pace during FY19, after rising steadily in FY17 and FY18. Ind-Ra expects further tapering of zinc prices in FY20 in view of a reduction in the supply deficit of refined metal amid a benign global growth environment and new mining capacities. Domestic zinc consumption growth is likely to remain muted in FY20 due to low demand growth in the automotive sector. However, a low global inventory level would provide a strong support for only a gradual decline.

In its base case financial projections, Ind-Ra estimates a zinc London Metal Exchange price of USD2,400/tonne for FY20 and of USD2,300/tonne for FY21.

Strong Liquidity: HZL posted a strong cash flow from operations of INR124 billion for 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 have reported strong operating cash flows for FY19, albeit lower than that in FY18 due to a correction in commodities prices and the increase in the cost of production. HZL’s capital allocation continues to be weighted by dividends and growth capex.

HZL continues to be in a net cash position. It had a high cash and equivalent balance of INR175 billion at 9MFYE19 (FYE18: INR222 billion). Vedanta has exercised the call option to acquire the government of India’s remaining ownership in HZL. The matter is currently subject to dispute. If Vedanta receives a favourable resolution, it may entail significant dividend outflows, which Ind-Ra has not treated in its base case financial projections.

Mine and Market Concentration: The Rampura Agucha zinc mine produces about half of mined metal in concentrate of HZL and constituted 43.5% of the total proven and probable zinc ore reserves of the company as on 31 March 2018. Also, the mine has the highest grades of ores among all the operating mines of HZL.

HZL derives about two-thirds of its zinc revenue from domestic sales, with the bulk of the sales directed towards galvanisation. Any downturn in the domestic steel demand could lead to low zinc demand.  Zinc faces competition from substitutes such as aluminium, stainless steel and other alloys for galvanised steel.


RATING SENSITIVITIES

HZL 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)

220,840.0

172,730.0

Operating EBITDA before income from associates (INR million)

122,720.0

97,390.0

Operating EBITDA margin (%)

55.6

56.4

EBITDA/interest cover (x)

43.4

48.2

Net debt  (cash)

-221,860.0

-242,550.0

Source: HZL, Ind-Ra 


RATING HISTORY

 

Current Rating

Historical Rating

Instrument Type

Rating Type

Latest Amount

Rating

23 October 2018

18 October 2017

CP programme

Short-term

INR50,000

IND A1+

IND A1+

IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instrument, 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.

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