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Hindustan Zinc Ltd (HZL) has to cope with a slew of unfavourable factors. The company is bogged down by subdued global demand for zinc. Further, there is looming uncertainty as the government is expected to offload its stake in the company. The government holds 29.5% stake in HZL.

The incremental share supply and ambiguity on cash usage after dilution of the government’s stake is likely to put pressure on the HZL stock, Nuvama Research said in a 5 December report.

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The brokerage has therefore downgraded its rating on the stock to ‘Reduce’ with a marginally upward revised target price of 292 per share. On Tuesday, HZL shares closed at 315.05 apiece. So far in FY23, the stock has risen by 1.6%. During this period, the company declared a total dividend of 36.5 per share.

Fall in zinc prices have kept sentiments for the stock muted, according to analysts.

On the London Metal Exchange (LME), zinc prices have fallen nearly 26% so far this fiscal. Recently though, zinc prices have rebounded with easing covid restrictions in China, an important market for metals. In the last one month, zinc prices on the LME have risen by 8.5% and are higher than the average price of $2,705 per tonne seen in FY17-22.

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Given the tepid demand outlook, sustaining these prices would be key as HZL’s earnings growth is mainly dependent on the price of the commodity. Analysts expect HZL’s earnings before interest, tax, depreciation and amortization (Ebitda) to peak out in FY23.

Additionally, investors would do well to track the pickup in volume.

HZL’s volume expansion projects and growth have suffered multiple delays in the past decade, said analysts at Kotak Institutional Equities. As such, it remains to be seen if HZL is able to achieve its targeted mined metal capacity of 1.35 million tonne per annum by FY25.

Kotak expects volume to increase at a compound annual growth rate of 5% over FY22-25E but the brokerage also sees the possibility of a downside risk.

While steady metal prices and volume scale up would boost margins, the company’s cost of production would be another key monitorable. Here, a fall in energy prices would be welcome. But in the longer run, increase in royalty costs due to expiry of HZL’s mining leases is a crucial headwind. To be sure, growth prospects in the near term remain unexciting, which could cap sharp upsides in the stock.

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ABOUT THE AUTHOR

Vineetha Sampath

Vineetha Sampath is a chartered accountant and is experienced in the field of research analysis. She joined Mint's Mark to Market team recently and this is her first stint in journalism.
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