Result Update: Hindustan Zinc Ltd - BUY - TP Rs.300 - Kotak

HZ's Q1FY19 performance was weak due to miss at operating level (lower volume and increase in the cost of production) and lower other income. The expansion to 1.2MT mined metal capacity is in its final stages and management expects to achieve a production run-rate by 4QFY19, this will led by the start of production shafts at RA/SK underground mines from 3QFY19.

Key Highlights

- Zinc production declined 11%/17% YoY/QoQ due to lower availability of zinc mined metal. Lead production declined 16% QoQ due to maintenance shutdown, resulting in 19% QoQ decline in silver production.

- Cost of production in 1QFY19 increased to US$1,043/tonne due to lower volume, higher power & fuel costs, and wage settlement.

- PAT was lower than estimate due to 41.8%/38.5% YoY/QoQ decline in other income to Rs2.99 bn, due to MTM loss on debt instruments.

- Mined metal and refined zinc-lead production in FY19 is expected to increase progressively with the ramp-up of underground mines. Silver production is expected to be in the range of 650-700MT.

Valuation & outlook

Zinc prices corrected in the recent past due to trade war and increase in zinc inventory (surplus in 1QFY19). However, as per ILZSG, zinc market is expected to remain in deficit in 2018 and we foresee the HZ to benefit from the favorable zinc environment. Besides this, given its presences in the lower end of the cost curve globally (backed by high grade captive mines), diversified revenue stream with an increasing contribution from silver and strong balance sheet augurs well for the company. Due to lower than expected 1QFY19, we have revised our estimates to Rs22.7 (earlier Rs24.4) and Rs24.1 (earlier Rs25.8) for FY19E and FY20E, respectively. The stock has corrected since our last recommendation (Reduce at CMP Rs.308) and now is trading at 6.2x/5.6x FY19E/FY20E EV/EBITDA, which in our view is attractive. Hence, we upgrade the stock to BUY, with a revised target price of Rs300 (earlier Rs318).

Shares of HINDUSTAN ZINC LTD. was last trading in BSE at Rs.273.15 as compared to the previous close of Rs. 267.6. The total number of shares traded during the day was 173704 in over 2542 trades.

The stock hit an intraday high of Rs. 274.45 and intraday low of 261.15. The net turnover during the day was Rs. 46796953.

Source : Equity Bulls

Keywords