Hindustan Zinc’s net profit for the March quarter was at Rs 2,583 crore, a dip of 11.8 percent year-on-year (y-o-y). Arun Misra, chief executive officer, and Sandeep Modi, chief financial officer, spoke to Moneycontrol on the company’s quarterly performance, the zinc market and capital expenditure plans. Edited excerpts.
What is happening with zinc? Zinc LME is down and the cost of production is up significantly at 17 percent for the March quarter.
Arun Misra: When we started last year, there was an overall push from commodity prices. There was the fear—the Russia-Ukraine war spilling into a lack of resources, and energy sources for Europe; of smelters shutting down; the US was struggling with high inflation. So all that pushed commodity prices upward and in zinc we saw the prices cross $4,000 per tonne.
While our cost also did go up, we got substantial benefits out of the higher price. That was at the beginning of the year. Of course, towards the end of the year, commodity prices softened; zinc prices also came down. Although stocks across the globe are quite low, it is one of the lowest in the ticket. While the expected growth in zinc worldwide is still between 2.5 percent and 3 percent, contrary to our expectations, the return of strong economic fundamentals in China has not happened. So, overall, if we look at it worldwide, there is no likelihood of prices going back immediately to earlier levels. It will still remain between $2,800 and $3,000 per tonne.
Your thoughts on the India zinc market….
Misra: Fortunately, India will see good demand because one, the Indian government’s thrust on expenditure on infrastructure and next year being an election year, to complete all balance infrastructure spending this year. So we expect that 4-5 percent growth in zinc demand will happen. Worldwide, prices will remain the same. Yeah, that’s it about the outlook. As far as we are concerned, you are very correct. We have produced good numbers this year. Although if you look at a year-on-year basis, this is the highest-ever EBITDA (earnings before interest, taxes, depreciation and amortisation), highest-ever PAT (profit after tax), that has been recorded.
And take us through the zinc production numbers, which grew just 2 percent?
Misra: Our overall capacity is only that much and we used to produce less in quarter one and progressively improved. I think we have come to a stage where we have stable production in each quarter, roughly around 260,000 tonnes. And last quarter, we said we should take a special jump to take it to 270,000 tonnes. And we have delivered exactly that. You will find a very stable performance from Hindustan Zinc quarter-on-quarter, rather than, you know, starting low and finishing high.
Sandeep Modi: Our annual guidance last year for the refined metal was 1,000-1,025 kilo tonnes (kt), however, we have produced 1032 (kt). So, we have exceeded the guidance.
What are the guidance numbers for this financial year?
Misra: This financial year, metal guidance (production) is 1,050-1,075 kt. And silver guidance is 725-750 tonnes.
And on the cost of production, are you seeing any easing off there?
Misra: Yeah, we saw the easing off. In the fourth quarter, with respect to the third quarter, we reduced the cost by about $80 per tonne. In this year’s March quarter, the cost was $1,214, and we are projecting a cost level of below $1,200, between $1,125 and $1,175. It is based on some easing of commodity prices, the use of more domestic coal (from Coal India) and also our cost reduction programme through structural initiatives. All put together, we’ll be able to achieve this cost.
What kind of capital expenditure are you seeing in this current financial year?
Misra: That would be between $175 and $200 million kind of gross capex that we’ll spend and this will be primarily for our roaster project and fertiliser project. Ordering is in process and work is about to start.
How is your cash position, bearing in mind the fact that you had a record dividend payout in FY23?
Modi: We have generated (cash) this year of around Rs 12,000 crore and if I see the current level of LME and whatever the guidance Mr Mishra has said for the volume and cost, if I take into that account, we are confident to deliver Rs 10,000 crore of cash generation next year. This is the way the cash flow is. And this Rs 10,000 crore, whatever we generate, we pay for the dividend debt repayment, and at the year-end we will be having around Rs 10,000-11,000 crore cash surplus in the balance sheet.
Misra: We don’t intend to raise any funds for this capex.
So these would be internal accruals?
Modi: Unless we feel that we are getting it at a very attractive rate, which is less than what I can yield in the market from our long-term investments.
Are you still provisioning to pay $2.98 billion to buy Vedanta’s international zinc assets, given the government, your stakeholder, had raised a concern with the deal? Are you factoring for that outgo this financial year?
Misra: This is subject to approval in the shareholders’ meeting, which has not yet happened. This is still hypothetical. So this has not been factored in.
Help us understand what the issue with the commissioning of your fumer plant in Rajasthan is. Your press release has mentioned a visa-related issue for the last two quarters.
Misra: No, so China visa issues are not yet over. It’s very difficult for Chinese professionals to get a visa for various reasons. So what we are looking at is now sending our engineers to China, getting them trained in the commissioning procedures live in a plant which is under commissioning there. And then they come back and we get it commissioned with remote support. So, with time, I am sure we will work it out and this quarter will be commissioning the fumer plant.
Any specific reason for these visa issues?
Misra: See, Chinese experts have applied for visas. Somehow their visa is not happening. Beyond that, I can’t comment. So it’s better to be practical about it and hence we have taken the other route of sending our people there to get them trained.
The plant is ready, it is standing. It is absolutely ready, it has to be commissioned. And we have one technology as a part of this plant which is very peculiar and it has been done the first time and by a Chinese company, and not many installations are there. That’s why we are unable to take the risk of commissioning ourselves, just for that one reason.
On the exports side, in your press release, you mentioned that you have a new registration now, which allows you entry into the US and Europe. What kind of export market share are you aiming for in FY24?
Misra: We know that Europe will provide a good market for us. Of course, there are steelmakers there. A lot of galvanised steel is consumed in countries like that. But the logistics cost was not permitting us. Now the logistics costs are favorable. So we have got entry in Europe where our product has already been tested by a big steelmaker there and we hope to now make Europe a base for expanding our exports. Similarly, in the US also we would be testing out with the customers there and then enter on our own strength instead of going through various traders, we would be directly selling to end users there.
Any numbers you are targeting as a volume share from exports and how much of that comes from each of these markets?
Misra: See, if we produced our 900,000 tonnes in the year in the revised guidance, so, out of 900,000 tonnes, in India the sales will be around 700,000 tonnes. So, 200,000 tonnes will still be left to be sold, still to be exported. Out of that 200,000 tonnes, I guess anywhere between 25,000 and 50,000 tonnes would be within Europe and the US.
So your overall export number still remains in the range of 25 percent?
Misra: I’m just hoping that 5 percent growth in India materializes, so the additional production in the guidance, whatever is there, 25,000, 45,000 tonnes, mostly should get absorbed in India itself.
One final question, in the footnotes for your March quarter results, you mentioned there is a power delivery agreement with Serentica Renewables India. Is this a group company?
Misra: Serentica is a group company and in that company, we have been investing 26 percent equity to be eligible for the group captive benefits.
For various duties—for as a group captive, some of the duties are waived off. And of course, overall calculations show it is cost-wise beneficial. That is why we are going with this agreement.
The footnote mentions two investments—Rs 350 crore and Rs 438 crore. These are two separate investments?
Modi: We had said against the Rs 350 crores, we have made till now Rs 105 crore (investment). These are two (Rs 350 crore and Rs 438 core) separate numbers because these are two separate power delivery agreements.