Hindustan Zinc: 2Q FY11 ahead of expectations: Buy; target price raised ::Daiwa

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Hindustan Zinc : 2Q FY11 results ahead of expectations: Buy maintained, target price raised



What has changed?
 Hindustan Zinc’s (HZL) 2Q FY11 results (announced on 20 October 2010) were in
line with forecasts in the market but slightly higher than we expected.
Impact
 Net sales for 2Q FY11 were Rs22.0bn (up 21.0% YoY and up 11.5% QoQ), 6.6%
higher than our forecast of Rs20.6bn. Net sales were driven largely by a higher zinc
realisation at US$2,165/tonne, compared with our expectation of US$2,085/tonne.
HZL secured a premium of US$150/tonne over LME zinc prices, up from
US$66/tonne for 1Q FY11 and better than our forecast of US$70/tonne.
 EBITDA was Rs11.3bn (up 4.6% YoY and up 10.1% QoQ) compared with our
forecast of Rs10.4bn. The adjusted PAT was Rs9.7bn (up 3.7% YoY and up
8.9% QoQ), 10.3% higher than our forecast.
 In 2Q FY11, HZL produced 176,200 tonnes of refined zinc (up 25.3% YoY and up
7.1% QoQ). The smelter at Rajpura Dariba that was commissioned in March 2010,
with capacity of 210,000 t.p.a, contributed 39,000 tonnes of refined zinc for 2
FY11. The company expects the 100,000 t.p.a. lead smelter to be commissioned by
3Q FY11, which should support sales-volume growth quarter-on-quarter.
 The LME zinc price was US$2,015/tonne on average for 2Q FY11 and is
US$2,359/tonne currently (up 17.1% compared with its average price for 2Q
FY11). The LME lead price was US$2,039/tonne on average for 2Q FY11 and
is US$2,373/tonne currently (up 16.4% compared with its average price for 2Q
FY11). We believe zinc and lead prices are likely to remain firm in 2H FY11,
leading to upside potential to our earnings forecast for FY11.
Valuation
 HZL trades currently at EV/EBITDA multiples of 8.1x for FY11 and 4.9x for
FY12, and PERs of 12.2x for FY11 and 8.7x for FY12 on our EBITDA and EPS
forecasts. We have raised our six-month target price for HZL to Rs1,414 (from
Rs1,254). We now value HZL based on a target EV/EBITDA of 6.0x on our FY12
EBITDA forecast (previously 5.0x). This reflects our view that, with the
commissioning of the 100,000 t.p.a. lead smelter, HZL will become the world’s
largest integrated zinc and lead producer, with zinc production costs in the lowest
decile worldwide, which should drive a re-rating of the company.
Catalysts and action
 We maintain our 1 (Buy) rating on HZL, with potential for a re-rating as noted
above. We see the key risk to our rating as a potential fall in LME zinc prices.