Hindustan Zinc's Generous Dividend: Rewarding Shareholders or a Risky Gamble?

Hindustan Zinc Ltd (HZL) has sent a bold signal to investors with its ₹10-per-share interim dividend announced on June 11, 2025—marking its first such payout for the fiscal year 2025-26. At face value, this move underscores the company's robust financial health, with a trailing 12-month dividend yield of 3.62% that outpaces its metals/mining peers. But beneath the surface, the decision raises critical questions: Is this dividend a reward for sustained profitability, or a preemptive bid to capitalize on current market sentiment? And what risks lurk in a payout ratio that exceeds earnings by 18%?

Financial Foundations: A Strong Q4, but at a Cost
HZL's dividend confidence stems from its stellar fourth-quarter performance in FY25. Net profit surged 47% year-on-year to ₹3,003 crore, driven by a 53% EBITDA margin—the highest in five years—thanks to rising metal prices and cost discipline. Revenue climbed 20% to ₹9,087 crore, while EBITDA hit ₹4,820 crore, a 32% increase. These gains allowed HZL to slash net debt to ₹1,500 crore from ₹2,200 crore in FY24, bolstering its balance sheet.

Yet the payout ratio—a measure of dividends relative to earnings—hits 118%, implying that HZL is dipping into cash reserves to fund dividends. This is not inherently risky given its ₹2.3 lakh crore market cap and liquidity, but it highlights a strategic choice: prioritize shareholder returns over reinvestment. Management has capped FY26 capital expenditure at ₹400 crore, a fraction of previous years, signaling a shift toward cash preservation.

Dividend Policy: Generosity or Overextension?
The interim dividend, combined with the ₹19-per-share payout in August 2024, positions HZL as a dividend stalwart. At ₹532.4 per share, the forward dividend yield could reach 14.23% if the final dividend matches expectations—a compelling draw for income-focused investors. However, this optimism hinges on two assumptions: sustained metal prices and a stable payout ratio.

The latter is precarious. While HZL's reduced debt and high margins provide a cushion, its reliance on silver—a metal accounting for 35% of revenue—exposes it to price volatility. A 10% drop in silver prices could erase ₹500 crore from annual profits, potentially straining the dividend. Management's focus on diversifying revenue streams, such as expanding base metal production, is a mitigating factor but not a guarantee.

Market Dynamics: Technicals Favor Bulls, Analysts Are Split
Technically, HZL's stock shows bullish signs. A golden cross (50-day moving average above the 200-day) and an RSI of 58 suggest upward momentum, with a potential rebound to ₹600. Volume spikes around the dividend announcement also hint at renewed investor interest.

Analysts are divided. Dolat Capital and JM Financial recommend a “BUY” with targets of ₹564 and ₹530, respectively, citing undervaluation (P/B ratio of 1.18 vs. peers' average of 1.5). Conversely, Nuvama and Kotak caution that the high payout ratio and commodity exposure justify trimming positions.

Investment Thesis: A Calculated Gamble
HZL's dividend strategy presents a compelling opportunity for investors willing to accept moderate risk. The stock's current price of ₹532.4 offers a margin of safety below its book value of ₹450, with further upside if technical indicators hold. The June 17 record date creates a “dividend capture” window, but investors should weigh two risks:

1. Commodity Exposure: Silver prices could weaken if global growth slows or central banks tighten policies.
2. Payout Sustainability: The 118% payout ratio may strain if margins compress, though HZL's cost-cutting and debt reduction provide a buffer.

A prudent approach would be to accumulate shares below ₹540, with a price target of ₹600 (13% upside), contingent on holding through the record date. For income investors, the 14% dividend yield offers near-term rewards, but active monitoring of silver prices and EBITDA trends is essential.

Conclusion: A Dividend Champion, but Not Without Limits
HZL's interim dividend is both a testament to its financial strength and a strategic bet on its ability to navigate commodity cycles. While the payout ratio is high, the company's balance sheet and cost discipline provide a solid foundation. However, investors must remain vigilant about external risks. For now, HZL's blend of income appeal and technical momentum makes it a stock to watch—just not one to hold blindly.