Hindustan Zinc
Company update
OUTPERFORMER
Global zinc stocks have reacted positively to the ~17% recovery in zinc prices over Jul-Aug 2010, while HZL’s
stock price has remained range-bound. We believe the sharp valuation discount (22%) for HZL vis-à-vis global
peers is unjustified given that HZL is relatively better placed in terms of business fundamentals. While we do
not see incremental upside for zinc prices in the near term, HZL’s core thesis of scale, robust cash flows and
high visibility on volume growth remains intact. We expect the proposed acquisition of Anglo’s zinc assets,
though inferior to that of HZL, to be EPS-accretive for HZL as the cash on books gets deployed to generate
higher RoE. The acquisition is, however, subject to board and other regulatory approvals, and hence our
numbers do not factor in the same. We expect 8.4% CAGR in HZL’s earnings over FY10-12, driven by 18%
CAGR in volumes even as rising production costs and lower utilization at existing capacities emerge as concern
areas. Our DCF analysis suggests that the current market price builds in a long-term average zinc price of
US$1,650/tonne assuming a 14-year mine life for the existing mining assets. We have upgraded our FY12
earnings estimate for HZL by 10% to Rs132 and maintain Outperformer on the stock with a revised price target
of Rs1,323 (5.5x FY12E EV/ EBITDA).
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