Visit http://indiaer.blogspot.com/ for complete details Hindustan Zinc Ltd (HZ)
N: 2Q results; nothing yet to get excited about
EBITDA of INR11bn in line with our estimate
Higher production and better underlying prices lead to 21%
y-o-y revenue growth; higher raw-material costs limit
EBITDA growth to just 5%; we prefer aluminium to zinc
We rate the stock Neutral with an INR1,280 target price
Hindustan Zinc reported fiscal 2Q11 (September) earnings in line with our and the
consensus estimates. Mined metal production rose 6% y-o-y (12% q-o-q), following
stabilization of a new concentrator at Rampura Agucha. Refined zinc production of 176kt
increased 25% y-o-y due to a contribution from the new 210ktpa hydro zinc smelter. Revenues
of INR22bn (HSBCe INR20.6bn/consensus INR21.1bn) rose 21% y-o-y (+12% q-o-q) due to
higher LME zinc prices and higher volumes. EBITDA of INR11.2bn (HSBCe and consensus
c11bn) was up 5% y-o-y (+10% q-o-q), but margins fell c800bps to 51% from 59% in 2Q10,
owing to higher stripping costs at mines and higher coal and coke costs. NPAT of INR9.5bn
(HSBCe and consensus INR9.5bn) was almost flat y-o-y (up 6% q-o-q).
We prefer aluminium to zinc. As we discussed in Metals & Mining Chartbook: Q4 2010
(18 October 2010), although zinc prices ran up in the latest quarter, zinc premiums have
not kept pace. Given flat premiums, the c64kt decline in LME inventories could be a shift
of stocks from exchange to non-exchange warehouses. However, for Hindustan Zinc,
implied premiums have been higher both q-o-q and y-o-y (see the results summary table
on page 3). With incentive pricing expected to return only in 2012, we would wait for a
better entry point into this stock.
We value HZ on FY12e EV/EBITDA of 5.5x. We retain our target price of INR1,280
and we rate the stock Neutral. Upside and downside risks that we see are higher- or lowerexpected
zinc prices and stronger- or weaker-than-expected volume growth, and another
upside risk is the proposed acquisition of Anglo Zinc assets.
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