Hindustan Zinc Wait for a better entry point:: Macquarie Research,

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Hindustan Zinc
Wait for a better entry point
Event
 2Q FY11 results in line: Hindustan Zinc (HZ) reported 2Q FY11 earnings
that were 4% above our estimates on EBITDA, driven by slightly higher-thanexpected
volume and other income. In our view, HZ is fairly valued and lacks
positive catalysts. We recommend switching to the parent company, Sterlite
Industries (STLT IN, Rs170.25, Outperform, TP: Rs218.00), which has
underperformed HZ by 54% in the last year and now has factored in all
(hopefully) negative news. We maintain our Neutral rating on HZ.
Impact
 Strong 2Q FY11 results – driven by volume: Net sales at Rs21.6bn grew
by 21% YoY and up 11% QoQ, driven by 16% YoY and 7% QoQ increases in
zinc sales volume. EBITDA was Rs10.9bn, up 4% YoY and 9% QoQ;
however, EBITDA margin was 50% vs 58% a year go due to increasing costs.
Reported net profit grew by 1% YoY to Rs9.5bn, compared with Rs9.4bn a
year ago and Rs8.9bn last quarter, slightly helped by higher other income.
 Earnings on track – and so is consensus: For 1H FY11, HZ reported EPS
of Rs43.4 in, or about 42% of our full-year estimate of Rs104.1 and
consensus of Rs105.8. However, with stabilization of the new concentrator at
Rampura Agucha and increased production from its new smelters in the
second half, our estimates look achievable.
 Board approval for acquisition – possible catalyst: The company is
awaiting government approval for the acquisition of Anglo’s zinc mines, which
will be a key catalyst for the stock. At first glance, this acquisition does look
inferior to the world-class assets owned by HZ; however, given the acquisition
price, we believe that it will around 10% accretive to EPS from year 1. If HZ is
able to turn around these mines and reduce costs, the upside could be
significant, in our view.
 Potential 26% tax – big risk: The new mining bill talks about a 26% tax on
mining profits to be distributed to traditional land owners. This directly affects
HZ and could erase 20% of its NAV; thus, it is a key overhang on the stock.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs1,206.00 based on a PER methodology.
 Catalyst: Uncertainty for minority shareholders following government stake
purchase and acquisition of Anglo.
Action and recommendation
 Maintain Neutral: HZ is fairly priced, in our view, and we wait for a more
attractive entry point, provided by falling zinc prices in the coming months.
Our commodity team forecasts zinc prices of $2,149/t in 3QFY11 versus
current spot prices of $2,350/t.