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Hindustan Zinc posted expected results. Higher zinc volumes (up by 7% QoQ) and
better premium on zinc products neutralised the effect of higher mining cost. This
led its operational profits to grow by ~8% QoQ.
Better volumes and higher premium on zinc products drives revenues
Higher sales of refined zinc (up by 7% QoQ to 175,000tonnes) and better premium on
its products (increased from US$76/tonne in 1QFY11 to US$125/tonne) led net sales to
increase by ~12% QoQ. Sales volumes were higher due to stabilisation of old smelter’s
operation (production was low in 1QFY11 due to water shortage) and the ramp-up of
the new 210,000tpa smelter which the company commissioned in March2010-end. The
new smelter produced 39,000tonnes during the quarter (operated at 74% capacity as
against 63% capacity in 1QFY11).
EBITDA/tonne increased marginally
The gross cost of production, at Rs53,500/tonne (US$1,152/tonne) was marginally higher by
2% QoQ. Better volumes and higher premium neutralised the effect of higher cost.
EBITDA/tonne, at Rs58,200/tonne (US$1,250/tonne), was higher by 2% QoQ.
Views
We expect that the company will ramp up its capacity and accordingly 2HFY11 zinc volumes
should be higher by ~8% from 1HFY11. We expect zinc prices to fall from the current levels
due to excess surplus in the system. According to International Lead and Zinc study group, the
global refined zinc market will remain in surplus both in 2010 (surplus of 233,000tonnes) and
in 2011(surplus of 161,000tonnes). However, even after assuming fall in prices, average zinc
prices in 2HFY11 is expected to be higher by ~9% to US$2,250/tonne from 1HFY11. The
current zinc price at LME is US$2,400/tonne. Thus, higher volumes and prices and control on
costs will lead its operating profits to increase by ~30% in 2HFY11 from 1HFY11 level.
Valuations
Despite the good performance expected from the company, we feel that the stock is fairly
valued. The global zinc companies are trading at an average of 4.8x 1-year forward
EV/EBITDA. The average of the last five year and last two year 1-year forward EV/EBITDA for
Hindustan Zinc is 3.3x and 4.2x respectively. At the current market price of Rs1,230, the stock
is trading at 7.6xFY11E EV/EBITDA and 5.3xFY12E EV/EBITDA, at a much higher premium to
its historical average. Hence, due to expectation of lower zinc prices and rich valuations, we
downgrade the stock from Accumulate to Reduce. At our target price of Rs 1,203, the stock
would trade at 7.2xFY11E EV/EBITDA and 5.0xFY12E EV/EBITDA.
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