Visit http://indiaer.blogspot.com/ for complete details Hindustan Zinc (HZL) reported net revenue of `2,163cr in 2QFY2011, marginally
higher-than-our-estimate of `2,049cr. However, net profit at `949cr was in line
with our estimate of `966cr.
Strong top line: Net revenue grew by 20.9% yoy and 10.9% qoq to `2,163cr.
Sales volume for zinc, lead and silver grew by 24.4%, 27.0% and 25.8% yoy,
respectively, to 175,309 tonnes, 14,458 tonnes and 36,879 kg. Average
realisation for zinc, lead and silver grew by 16.1%, 10.0% and 35.6% yoy,
respectively, to US$2,238/tonne, US$2,338/tonne and US$656/kg, respectively.
The new 210ktpa zinc smelter contributed ~39,000 tonnes to production.
Lower EBITDA margins and higher depreciation lead to lower net income growth:
EBITDA margins declined by 807bp yoy to 52.0%, although flat on a qoq basis.
The decline was mainly due to a) higher stripping costs at mines, resulting in a
29.7% yoy increase in mining expenses, b) 90% yoy increase in stores and spares
cost and c) 46.8% yoy increase in power costs on account of higher coal cost.
Consequently, EBITDA grew by 4.6% yoy to `1,125cr. During the quarter, other
income increased by 19.7% yoy to `184cr and depreciation expense increased by
50.2% to `116cr. Consequently, net income grew by only 1.5% yoy to `949cr.
Outlook and valuation: At the CMP of `1,227, the stock is trading at 7.7x
FY2011E and 5.2x FY2012E EV/EBITDA. HZL is expected to benefit from the
expansion of zinc-lead smelting capacity and increased silver production. Further,
HZL had a huge cash balance of `12,213cr at the end of the quarter (`289 per
share). We recommend Accumulate on the stock with a revised Target Price of
`1,342 (earlier `1,227), valuing the stock at 6.0x FY2012E EV/EBITDA.
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