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HINDUSTAN ZINC
Concentrate sales boost earnings
Q3FY11 PAT 20% above expectation
Hindustan Zinc (HZL) reported Q3FY11 net revenue of INR 26 bn, 10% above
expectation due to zinc and lead concentrate sales of ~24 kt with revenue of
INR 2.3 bn (our estimate: nil). In the past two quarters, concentrate sales were
virtually nil considering the ramp up in zinc and lead volumes. PAT, at INR 12.9
bn, was accordingly higher than our estimate of INR 10.7 bn. Currently, cash on
books is INR 130 bn.
EBITDA up 34% Q-o-Q due to concentrate sales
Zinc and lead volumes, at 178 kt and 12 kt, respectively, were broadly in line
with our estimates. Lead production dipped 14% Q-o-Q due to maintenance
shutdown. The company reported EBITDA of INR 15 bn (up 9% Y-o-Y and 34%
Q-o-Q). Its reported zinc net cash cost was USD 792/t (excluding royalty) for the
quarter. As per our estimate, blended cost/tonne jumped 14% Y-o-Y.
Lead expansion by Q4FY11; silver expansion by Q4FY12
The 100 ktpa lead capacity expansion is expected to be completed in Q4FY11.
The new 1.5 mtpa mill at Sindesar Khurd mine commenced trial run during the
quarter. By FY12 end, silver production capacity is likely to increase to 500
tonnes from 180 tonnes (end FY10). The company is setting up a 150 MW wind
power project at a capex of INR 8.6 bn, likely to be completed by Q2FY12.
Proposed stock split and bonus issue
HZL has proposed stock split of 5:1 and bonus of 1:1. The current FV of shares
is INR 10.
Outlook and valuations: Positive; maintain ‘BUY’
We cut our lead volumes for FY11 leading to marginal downward revision of our
FY11E EBITDA and EPS by 4% each. We broadly retain our FY12 profit
estimates. We introduce FY13 estimates. In FY13, we estimate EBITDA and EPS
growth of ~9% and ~12% Y-o-Y, respectively. We remain positive on the stock
due to the impending volume growth in FY12 (22% Y-o-Y), competitive cash
costs, and strong balance sheet. We maintain ‘BUY/Sector Outperformer’
recommendation/rating on the stock.
Company Description
HZL is a part of the Sterlite Group and is the only integrated zinc manufacturer in India,
with zinc smelting capacity of 879 kpta and lead smelting capacity of 85 ktpa. The
company is the second-largest integrated zinc and lead producer in the world. It
accounted for ~74% of zinc consumption in India in FY10. HZL’s vision is set to become
the largest integrated zinc producer in the world with 1 mtpa capacity post
commissioning of the 100ktpa lead smelter. The company’s fully-integrated zinc
operations include three lead-zinc mines, two zinc smelters, a lead smelter, and one
lead-zinc smelter in Rajasthan and one zinc smelter in Andhra Pradesh. HZL’s mines
supply all of its concentrate requirements.
Investment Theme
HZL has added significantly to its capacity, with further expansion in the pipeline, to
emerge as a globally leading zinc player. Its Rampura Agucha mine is amongst the
world’s largest and low-cost zinc mines. Overall, HZL’s integrated operations, access to
high quality captive concentrate, and low-cost structure are its strengths. The company
has cash of INR 130 bn (INR 309/share) on its balance sheet with virtually nil debt.
Key Risks
• HZL’s share price is sensitive to LME zinc prices. Lower-than-estimated LME prices in
the event of a demand slowdown or oversupply will adversely impact the company’s
earnings.
• Delay in completion/ramp up of expansion projects will adversely impact its
earnings.
• Any significant INR appreciation will also reduce earnings.
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