| Hindustan Zinc Limited | ||||||
| Ratings reaffirmed at 'CRISIL AAA / Stable / CRISIL A1+ '; rated amount enhanced for Bank Debt | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 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 Ltd (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 geographical and product concentration in revenue.
In fiscal 2023, robust production rates, mined metal production of 1032 kilo tonne (KT; against 967 KT in fiscal 2022) along with healthy realisations led to strong earnings before interest, tax, depreciation and amortisation (EBITDA) of Rs 17,506 crore (against Rs 16,289 Crore in FY2022) despite increase in cost of production owing to higher input prices.
Commodity prices have moderated since fiscal 2023 amid global macro headwinds and fear of lower-than-expected Chinese demand growth but continues to remain robust. This, coupled with efficient cost of production along with expected easing of energy prices due to reduction in domestic power cost post monsoon, should support the company in witnessing healthy operating accrual going ahead, and the same will remain key monitorable.
CRISIL Ratings also notes the announcement by HZL (dated July 21, 2022) wherein HZL’s board had approved the proposal for setting up a 5-lakh tonne per annum fertiliser plant (through its wholly-owned subsidiary, Hindustan Zinc Fertilizers Pvt Ltd.) and 160 KTPA roaster. Expected capital expenditure (capex) of around Rs 2,500 crore will be funded through internal accrual and will not have any material impact on the credit risk profile of the company. The plant is likely to be commissioned in fiscal 2025. Developments in this regard remain a key monitorable.
CRISIL Ratings notes that due to the high dividend payout, by HZL in last fiscal (Rs 31,901 crore in fiscal 2023), the company turned net debt (total debt minus total cash) positive as on March 31, 2023, with net debt of around Rs 1,760 crore as on March 31, 2023 (against a net cash position of Rs 17,967 crore as on March 31, 2022). However, despite the same, financial metrics remains strong and are expected to remain strong over the medium term because of healthy operating profitability and cash accruals. Further, rating factors in the expectation of the company becoming net cash positive in the coming quarter. Sustenance of the balance-sheet strength with continued net cash position and increase in net-worth by retention of operating earnings, supporting reduction in gearing from current levels, will remain key rating sensitivity factors.
CRISIL Ratings has withdrawn its rating on proposed NCDs of Rs 1000 crore on receiving confirmation from the company, as the same was unutilised proposed NCDs. The ratings are 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 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 enjoys leading position 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 2022, export accounted for around 25% of turnover.
Integrated operations and high-grade reserve, leading to competitive cost position Despite increase in cost of production, mainly due to higher energy prices, the cost of production for HZL ranks in the first quartile globally (zinc metal cost, excluding royalty, was USD 1,257 per tonne in fiscal 2023, up from USD 1,122 per tonne in fiscal 2022). Operating efficiency is high, driven by fully integrated operations (with captive power plant capacity of 485.5 MW) and low-cost, high-grade zinc reserve. As on March 31, 2022, total reserve and resources were 448 MT, ensuring 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 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 10,061 crore as on March 31, 2023 (Rs 20,790 crore as on March 31, 2022). However, backed by healthy cash accrual, 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 a dividend of Rs 31,901 crore in fiscal 2023 (Rs 7,606 crore in fiscal 2022 and Rs 15,972 crore in fiscal 2021). It had outstanding debt of Rs 11,841 crore as on March 31, 2023 (Rs 2,823 crore as on March 31, 2022, and 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 during past fiscals. However, despite the same, financial metrics remains strong and are expected to remain strong over the medium term because of healthy operating profitability and cash accruals. Sustenance of the same will be key monitorable.
Weakness: 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 the end-user 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-lead business accounts for more than 75% of revenue and profitability. The company faces regulatory risks as the business (all mines) is concentrated in Rajasthan. Royalty cost per tonne of mined metal has increased by more than 125% in the past six years. |
Liquidity: Superior Cash and liquid investment stood at Rs 10,061 crore as on March 31, 2023 (Rs 20,790 crore as on March 31, 2022). The company had outstanding debt of Rs 11,841 crore as on March 31, 2023 (Rs 2,823 crore as on March 31, 2022). Although dividend cash outflow remained high (to increase shareholders’ return and continued assistance towards Vedanta Resources Ltd.’s debt obligation), overall 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 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
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:
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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 restructuring of the Vedanta group in India, HZL became a 64.9% subsidiary of Vedanta Ltd ('CRISIL AA/Stable/CRISIL A1+'). 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 number)
*Unadjusted numbers for FY2023 as annual report for FY2023 is yet to be published |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
#Sublimit of bill discounting facility of Rs 700 crore, export packing credit of Rs 500 crore and foreign usance bills of Rs 500 crore ^ - Sublimit of standby letter of credit of Rs 1250 crore and bank guarantee of Rs 200 crore @ - Capex Letter of Credit of Rs 750 crore with tenor of more than 3 years as sublimit of non-fund based limit ^^Sublimit of bank guarantee of Rs 400 crore *Sublimit of export packing credit / bill discounting / PCFC / bank guarantee / letter of credit / working capital demand loan / short-term loan (STL) limit of Rs 500 crore %Yet to be placed
Annexure - Details of rating withdrawn
%Yet to be placed |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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