Motilal Oswal: HIND ZINC 2QFY11: In line; Mine production up 6%; Maintain Buy

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HIND ZINC 2QFY11: In line; Mine production up 6%; Costs up 21%; Maintain Buy

-          Hindustan Zinc (HZ IN, Mkt Cap US$12b, CMP Rs1,245, Buy) 2QFY11 adjusted PAT increased 4% YoY to Rs9.7b (vs est of Rs9.5b). Reported PAT of Rs9.5b included Rs212m towards VRS.

-          EBITDA of Rs11.3b (up 5% YoY) was also in line with our estimates of Rs11.2b.

Refined metal production up 25%, LME up 13%; some gains were offset by currency appreciation, lower sales of concentrate

-          Net Sales increased 21% YoY to Rs22b. Production of refined zinc, lead, and silver increased 25%, 20% and 9% YoY to 176k tons, 16k tons and 44 tons, respectively. Recently commissioned Dariba smelter produced 39k tons during the quarter, thereby achieving capacity utilization of 74%.

-          Mine production grew 6% YoY to 205k tons. Sales of concentrates have declined due to growth in refined metal production.

-          Average zinc LME increased 13% YoY; some of the gains were eroded by 4% currency appreciation.

EBITDA up 5% YoY; Cost of production (incl royalty) increased 21% to US$977/ton

-          EBITDTA increased 5% YoY to Rs11.3b. The positive impact of higher volumes and improved LME prices was partly offset by the impact of increase in coke and coal costs, increase in commodity prices and higher stripping cost at mines. As a result, for the quarter, net zinc metal cost with royalty increased 21% to US$977/ton.

100ktpa lead smelter delayed by a quarter to 3QFY11; Maintain Buy

-          A 100ktpa Lead smelter is delayed by a quarter to 3QFY11.

-          Sindesar Kurd (SK) mine along with 1.5mtpa mill is expected to be commissioned by 3QFY11.

-          Silver production capacity expansion to 500 tons is expected by FY13.

-          Cash and equivalents remained flat QoQ at Rs122b, most of which is invested in debt mutual funds (Rs74.4b).

-          We remain positive on stock due to strong volume growth of zinc metal and sharper growth in lead and silver production. Stock trades at an EV/EBITDA of 7.2x FY11E and 5.5x FY12E and P/E of 11.6x FY11E and 10x FY12E assuming zinc and lead prices of US$2,200/ton. Currently, zinc prices are trading at ~US$2,400/ton. For every US$100 change in LME, the EPS upside is 5-6%. Maintain Buy.