Hindustan Zinc: Fundamentals intact, but is the stock worth the risk?

Indian Express

16-07-2025

A flurry of developments at Vedanta Group's crown jewel, Hindustan Zinc, has left investors and analysts divided. Over the past 16 months, this traditionally low-volatility stock has seen a rollercoaster ride.
On the global front, Trump tariffs and geopolitical tensions have increased silver and zinc prices. On the domestic front, infrastructure development has boosted demand for zinc. On the operations front, the company is firing all smelters, running at 93% capacity, and breaking production records. Hindustan Zinc reported its second-highest revenue and net profit in FY25, following a record year in FY23.
Despite this, its stock price has dipped 46% from its all-time high of Rs 807.70 on 22 May 2024. The stock underperformed the Nifty Metal Index, rising 132% in 5 years as against the 347% rally in the Index.
5-Year Stock Price Momentum of Hindustan Zinc and Nifty Metal Index
Hindustan Zinc is among the top five silver producers in the world, and the only company that produces silver from primary sources. But its stock reported tepid growth even when silver prices reached a new lifetime high of over Rs 1.15 lakh per kg on July 14.
What is preventing the stock from rallying?
At the heart of investors' concerns is Hindustan Zinc's ownership structure. UK-based Vedanta Resources (VRL) holds a 56.38% stake in Vedanta Ltd (VDL). VDL holds a 63.42% stake in Hindustan Zinc. VRL has been deleveraging its balance sheet, which accumulated debt over the years from several failed acquisitions. Hindustan Zinc became the crown jewel of VDL as it was debt-free and had strong cash reserves.
In May 2024, VDL's subsidiary Vedanta Semiconductors raised Rs 1,804 crore in secured debt from private creditors by pledging Hindustan Zinc shares. Vedanta Semiconductors gave a two-year unsecured inter-corporate loan to VDL, which the latter used to repay debt and pay brand fees to its holding company, VRL.
Multiple such transactions shifted VRL's loan to VDL. In FY23, metal stocks had a fantastic year with a cyclical rally and robust profits. As the largest shareholder, VDL has the power to decide the dividend amount of Hindustan Zinc. VDL decided to use the money locked in Hindustan Zinc's reserves by issuing dividends.
Hindustan Zinc's Dividends, Reserves, and Borrowings (FY 21-FY25)
In FY23, Hindustan Zinc paid Rs 31,901 crore in dividends alone, which reduced its reserves by 64% to Rs 12,097 crore. These reserves are used to fund growth projects and give long-term returns to shareholders. VDL, as a shareholder, had the right to claim the reserves. But this reduced the company's capacity to self-fund expansion.
Hindustan Zinc had to borrow money to meet its capital expenditure requirements. FY23 dividend converted the net cash company into a net debt company. While its debt-to-equity ratio remains below 1.0, the loss of reserves has weakened its balance sheet.
Significant debt is a concern for metals and mining companies. They sell their output on the commodity prices, which are determined by market forces. They can only control the cost of production (CoP). Keeping debt low helps the company sustain a period of low prices and stay profitable. So far, Hindustan Zinc's debt is sustainable as the high price of zinc and silver and low CoP have increased the company's profits and operating cash flow.
However, Hindustan Zinc's share price has declined, at least partly, due to a decrease in equity reserves over the last three years.
Hindustan Zinc's Book Value Per Share From August 2020 to April 2025
Hindustan Zinc's promoters have been offloading stake after halving the reserve.
Amidst this, Hindustan Zinc CEO Arun Misra's proposal to demerge the zinc and silver business was rejected by the Ministry of Mines. Misra, however, believes that demerging the precious metals segment will be value accretive, as Hindustan Zinc is India's only listed silver producer.
This restructuring and reduction of reserves have limited the stock's upside potential.
Hindustan Zinc is the second-largest integrated zinc manufacturer in the world. It has one of the lowest CoP at $1,055 per tonne (in FY25). As commodities are bought and sold in dollars, a strengthening of the dollar increases rupee cash flow.
All three factors — higher commodity prices, depreciating rupee, and lower CoP — were in Hindustan Zinc's favour, which helped it report an Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin of 51% in FY25.
Factors Affecting Hindustan Zinc's EBITDA
Its revenue surged 18%, EBITDA 28%, and profit after tax 33% in FY25. It reported its second-highest free cash flow before capital expenditure (capex) of Rs 13,784 crore.
Hindustan Zinc is growing its production by 3-4% annually through operational improvements, which it believes could generate Rs 50,000 crore free cash flow pre-capex in five years. It now aims to double its production capacity from 1.13 million tons per annum (mmtpa) to 2 mmtpa in the long term as steel demand increases. It announced the first phase of this expansion, under which it will add 250,000 mtpa capacity over the next three years.
Hindustan Zinc is basing its expansion on India's ambitious plan to achieve 300 mmtpa of steel production in the next 2-3 years.
It expects the phase 1 expansion of Rs 12,000 crore to generate Rs 40,000 crore revenue and Rs 21,000 crore EBITDA.
Hindustan Zinc's Earnings Expectations from Phase 1 Expansion
Source: Hindustan Zinc Q4FY25 earnings
With a Return on Capital Employed (ROCE) of 58%, growth capex should be welcome news. Capacity expansion could lead to higher EBITDA and free cash flow, helping it service debt and rebuild equity reserves, thereby increasing its enterprise value.
The capacity expansion is projected to increase Hindustan Zinc's capacity to produce silver. At 1.2 mmtpa, the company produces 750 tons of silver. If the company reaches 2 mmtpa capacity, it could produce 1,200-1,300 tons of silver. The company is also implementing innovative technology at one smelter, which, if successful, could recover an additional 27 mtpa of silver and 6,000 mtpa of lead from the smelter waste without burning. The increasing mix of precious metals could help the company boost profits.
These long-term growth drivers are being offset by short-term uncertainty around dividend policies and the parent company's demerger and deleveraging.
Analysts have mixed ratings on Hindustan Zinc. JM Financial is bullish on Hindustan Zinc for its low CoP, high-grade, long-life captive mines, and its ability to scale. Even Motilal Oswal is optimistic about the zinc producer's expansion plans, but believes that the market has already priced in the positives.
Analyst Ratings on Hindustan Zinc
Source: Brokerage Reports
Nuvama has a 'Reduce' call on Hindustan Zinc. It stated that expansion will facilitate long-term growth, but commodity prices could affect near-term earnings, making the stock's valuation expensive till then.
The miner's valuation is determined by enterprise value to EBITDA (EV/EBITDA). While the capacity expansion and cost efficiencies are growing its EBITDA, high dividend payouts, which result in lower cash, and therefore higher debt, are potentially impacting overall valuations. The company's current EV/EBITDA is 10.7x, higher than its 5-year median of 9.0x, and double that of Vedanta's 5.65x.
Adding to the volatility, US-based Viceroy Research took a short position against VRL's debt, alleging that the Vedanta Group is on the 'brink of insolvency.' Vedanta Group has denied the claims, calling them a 'malicious combination of selective misinformation and baseless allegations to discredit the group'. This controversy could keep Hindustan Zinc's share price volatile in the short term.
However, Hindustan Zinc's strategic capital discipline, strong fundamentals, leaner cost base, and leadership in the fourth most widely used metal (zinc) make it a resilient stock that could continue paying dividends.
Note: We have relied on data from http://www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
Puja Tayal is a financial writer with over 17 years of experience in the field of fundamental research.
Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
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