Hindustan Zinc’s expansion plan fails to impress as near-term growth stalls
The miner’s ambitious ₹35,000-crore expansion aims to lift capacity and lower costs. But lease uncertainties, muted volume growth, and softening zinc prices have left investors unconvinced.
Hindustan Zinc Ltd (HZL)’s capacity expansion plan failed to cheer investors, with the stock sliding about 9% after the promoter group offloaded 1.6% of its shareholding. The company has announced plans to invest ₹12,000 crore in the first phase between FY26 and FY28, with total capex reaching ₹32,000-35,000 crore by FY31.
Despite a healthy balance sheet, with net debt-to-equity of 0.1x at FY25-end, and steady operating cash flows, the scale of expansion raises questions over the company’s future dividend payouts. However, the management has indicated it may tap the balance sheet to maintain dividend payouts.
Read this | ₹12,000 crore expansion to help Hindustan Zinc pare cost, more expansion soon: CEO Arun Misra
The first phase, to be completed in three years after equipment ordering, involves setting up a zinc smelting plant of 0.25 million tonnes per annum (mtpa) capacity at its existing facility in Dariba, Rajasthan, increasing the total capacity by over one-fifth to 1.38 mtpa. About half of the investment would go towards building the associated mining infrastructure to meet the additional ore requirement.
However, the expiry of lease for three of its five mines in 2030, accounting for 65% of its total ore production, dampens the returns prospects from the project. While the company may be able to retain the mining rights over these mines, it may face higher royalty for lease renewal.
A 17 June Kotak Institutional Equities report estimates HZL’s Ebitda from the expansion project to decline by 17% in case of a 10% increase in royalty. Also, the project remains prone to delays. “Past records suggest risks of delays in the execution of growth projects," said the Kotak report.
HZL would also set up a plant to increase the recovery of silver from waste, expected to increase to 830 tonnes per annum (tpa) from current 800 tpa. After the second phase, total metals refining capacity (zinc plus lead) would go up to 2 mtpa with silver production capacity increasing substantially to 1,500 tpa. The cost of setting up the smelter is projected to be lower than the global average and would help the company achieve cost of production of $1,000 per tonne, marginally lower than current $1,025-1,050.
Yet, the company's near-term earnings outlook remains tepid, with limited headroom for volume growth amid mixed trends for commodity and precious metal prices. Despite plants running at near full capacity, metals production rose by just 1% CAGR between FY23 and FY25. Volume guidance for FY26 stands at 1,100 kilo tonnes (kt) against production of 1,052 kt in FY25, and silver at 705 tonnes, against 687 tonnes in FY25.
Read this | Hindustan Zinc needs timely expansions to refuel volume growth
Also, zinc prices are expected to moderate marginally after a sharp increase of 16% in FY25, with increase in global supplies. Spot prices at the London Metal Exchange are already 8% lower than Q4FY25 levels, though low inventory should lend some support. Domestic demand remains strong with sustained growth in steel production where zinc is used as a consumable during galvanization process.
According to a 17 June JM Financial Institutional Securities report, HZL’s zinc realization is projected at $2,900 per tonne in FY26, compared to $2,910 in FY25. Meanwhile, silver, which contributed 29% to HZL’s FY25 Ebitda, could benefit from stronger prices, which are expected to average $33 per ounce versus $30.4 last year. JM Financial estimates Ebitda to rise a modest 6% in FY26, slowing sharply from 28% growth in FY25.
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The stock trades at an enterprise value of 9.6x FY26 estimated Ebitda, as per Bloomberg, higher than the five-year average of 9x. The stock faces risk from fluctuations in commodity price and may not find much favour with investors in the near term given the lack of upside triggers.
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