Maintain Buy on Hindustan Zinc - Centrum

Expansions come on stream, maintain buy

Hindustan Zinc (HZL) reported lower-than-expected results with net sales of Rs27.5bn, up by 5.6% YoY and PAT of Rs12.7bn, down by 1.2%YoY. EBITDA stood at ~Rs14bn with margin at 51.1% (against our expectation of 52.4%), 540bps lower QoQ due to higher mining and operational costs as new capacities in lead and silver stabilised and LME realizations remained subdued. We expect robust lead and silver volumes ahead as stabilisation process of new capacities nears completion and maintain our positive stance on the stock on account of sound operations and attractive valuations. Reiterate Buy with a revised target price of Rs159.

Lead and silver volumes increase as expected: With the commissioning of new lead smelter of 100ktpa and 350 tpa silver refinery, lead and silver sales went up sequentially by ~84% and ~18% respectively. Zinc volumes remained subdued with ~3% QoQ growth as the lower grade ore patch in zinc mines continued to affect the mined metal production.

Margin under pressure due to higher mining and operational costs: EBITDA dropped by 7% YoY and 4% QoQ to Rs14bn and EBITDA margin stood at 51.1% (lower than our estimate of 52.4%) and down sequentially by 540 bps as operational costs went up on account of stabilization of new capacities in lead and silver. Also, mining costs were higher as the lower grade ore from zinc mines continued to be used and LME realizations dropped sharply QoQ.

Conference call highlights: New lead smelter of 100ktpa operated at 70% capacity utilization in Q3FY12 and HZL expects FY12E exit at 90% utilization. Silver refinery of 350 tpa is fully commissioned and higher silver production is expected as SK mine ramps up to 2 mtpa. Expansion at Kayar mine is progressing well and mining cost at Rampura Agucha mine is expected to reach ~US$350/tonne progressively from US$280/tonne as the mine goes underground by FY14E. The company lost ~4000 tonnes of lead production and 3500 tonne of zinc production due to maintenance shutdown during the quarter. Silver production in FY13E is expected to be above 400 tonne.

Earnings revised downwards marginally: We revise our earnings estimate marginally to account for lower zinc volumes and higher mining costs. We maintain our lead and silver volume estimates and remain conservative on our LME zinc and lead realization assumptions but see upside risk to the same going forward as demand starts to improve globally. Increase in coal prices and royalty have a downward risk to our earnings going ahead.

Valuations remain attractive, Reiterate Buy: We continue to like the stock due to strong volume growth in lead and silver, lower overall cost proposition, improvement in LME zinc and lead prices going forward and attractive valuations with favorable risk-reward. We shift our valuation base to FY14E and value the stock at 5x FY14E EV/EBITDA. We maintain our Buy rating on the stock with a revised target price of Rs 159.

Source : Equity Bulls

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