Hindustan Zinc :Higher realizations and volumes lift earnings growth.BUY:: Kotak Sec

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Hindustan Zinc (HZ)
Metals
Higher realizations and volumes lift earnings growth. HZ’s reported 2QFY11 net
profit of Rs9.5 bn (+1.5% yoy, +6.5% qoq) was ahead of our estimate of Rs8.6 bn.
Earnings growth was led by a mix of higher realization and volumes, partly offset by
increase in cost of production. We raise our FY2012-13E zinc price assumption by 7.5%
and 7.1% and EPS by 0.4% and 3.8% to Rs116.4 and Rs 134.2. We raise our TP to
Rs1,430 (Rs1,240 earlier) on marginal revision of estimates and roll over to FY2012E


2QFY11 EBITDA and net income ahead of expectations on better volumes
HZ’s reported 2QFY11 net profit of Rs9.5 bn (+1.5% yoy, +6.5% qoq) was ahead of our
expectation of Rs8.6 bn. EBITDA of Rs11.3 bn (+10.1%qoq, 4.6% yoy) was also ahead of our
estimate of Rs10.4 bn. Growth in EBITDA/net income was led by (1) higher volumes—refined zinc
production grew 7.1% qoq and 25.3% yoy to 176K tons. Lead production grew marginally.
The company also recorded lead metal-in-concentrate sales of7.5K tons; and (2) higher
realizations—zinc realization for quarter was US$2,154/ ton (+0.5% qoq, 11.6% yoy) and lead
realization was US$2,262/ ton (+0.4% qoq, 6.3% yoy).
Net zinc metal cost of production increases significantly
HZ’s 2QFY11 net zinc metal cost of production increased by 21% yoy to US$977/ ton. HZ
attributes this to increase in power and fuel costs and higher stripping costs at its mines. We note
that strip ratio of HZ’s Rampura Agucha will likely increase to 14.2 tons in FY2011E from 10.7 tons
in FY2010. The company attributes increase in strip ratio to dimensional change in the pit.
Raising our zinc and lead price assumptions
We raise our zinc and lead price assumptions by 5.3%, 7.5% and 7.1% to US$2,000/ton,
US$2,150/ton and US$2,250/ton for FY2011E, FY2012E and FY2013E, respectively. While nearterm
zinc prices may be under pressure from mounting inventory and production restarts, our
medium-term positive outlook is supported by the fact that mine supply may fail to keep pace with
demand. Supply may get constrained in 2011 on likely exhaustion of a few large mines
(Brunswick) and significant drop in production from a few existing ones.
Increase estimates and maintain BUY rating with a revised TP of Rs1,430
We increase our EPS estimate by 0.4% and 3.8% to Rs116.4 and Rs134.2 for FY2012E and
FY2013E. We raise our target price by 15.3% to Rs1,430, on marginal revision in our earnings
estimates and roll-over of target price to 2012E financials. HZ is trading at attractive valuations of
5.1X FY2012E EBITDA. Maintain BUY rating. Note that our estimates do not include the recently
announced acquisition of zinc assets of Anglo American.