Hindustan Zinc: Highlights OF Q2FY11 financials: IDFC research

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Highlights OF Q2FY11 financials
• HZL’s Q2FY11 revenues at Rs 22.0bn (down 12% qoq) were significantly lower than our estimates of Rs 24.6bn
primarily led by (a) No concentrate sales v/s our estimates of 20,000 tonnes of zinc concentrates (b) lower by-product
credits (c) lower than expected sales volume of refined lead which came at 14,458 tonnes against our estimates of
15,131 tonnes
• Zinc realizations/tonne at Rs100, 645 were up 2.9%qoq despite average LME prices declining by 4%. The above was on
account of a rise in market premium over LME prices, which came at US$162/tonne (up 70%qoq)
• Apart from lower revenues the decline in EBITDA was also led by a US$27/tonne increase in operating costs.
We are particularly surprised by 13%qoq increase in mining and manufacturing expenses/tonne. The company had
earlier guided for an increase in mining costs on the back of rising stripping ratio at Rampura Agucha mine.
• Other income at Rs1.8bn (up 16%qoq) surprised us positively, whereas depreciation expenses at Rs1.2bn (up 3%qoq)
were higher than our estimates of Rs1.1bn. Overall PAT at Rs9.5bn (up 6%qoq) was below our estimates of Rs12.4bn
• Construction activity at the 100,000 tpa lead smelter at Rajpura Dariba is progressing as planned, and is on schedule
for completion by Q3FY11. Primary mine development activity at Sindesar Khurd mine (SKM) project is progressing
and is now expected to commence from Q3FY11. Also the new 1.5m tpa mill at SKM is expected to commence
production by end of Q3FY11
• Overall, post HZL we are downgrading our Sterlite estimates for Q2FY11 by 14% to Rs10.7bn


􀂉 Downgrading our FY11 & FY12 earnings estimates with a revised price target of Rs 1,315 per share
We had argued in our report dated 21st Sept’10 that HZL valuation discount to its global peers is unjustified given its
leadership position and significantly better cost structure. While a 13% rally in the stock price has narrowed the discount,
HZL still trades at a marginal discount to its global peers. Consistently rising production costs is emerging as a key area
of concern. We are downgrading our FY11 and FY12 estimates by 6% and 2% respectively to factor in lower concentrate
sales and higher cost structure even as we upgrade our zinc price estimate for FY12 by 5% (to US$2100/tonne). We
maintain our Outperformer rating on the stock with a revised price target of Rs1,315 (Rs1,323 earlier) based on 5.5x EV/
EBITDA multiple on FY12 earnings