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Hindustan Zinc (HZ)
Metals & Mining
Solid quarter. HZ’s reported 3QFY11 EBITDA of Rs15.1 bn (+8.7% yoy, +33.9% qoq)
was ahead of our estimate of Rs13.1 bn. Cost of production declined marginally to
US$793/ton (excluding royalty). Expansion project, though a tad delayed, will strongly
contribute to FY2012E earnings. We raise our earnings estimates for FY2012E and
FY2013E by 7.8% and 4.9%, respectively on the back of revision in our zinc and lead
price forecast. Maintain BUY with a revised TP of Rs1,535 (Rs1,430 earlier).
Higher realizations and concentrate sales drive EBITDA and net income
HZ’s reported 3QFY11 EBITDA of Rs15.1 bn (+8.7% yoy, 33.9% qoq) was 15.3% higher than our
estimate of Rs13.1 bn. Net income of Rs12.9 bn was 17.1% ahead of our estimate. EBITDA and
net income growth was led by higher zinc and lead realization. Better-than-expected performance
can be attributed to (1) zinc concentrate sales of 18K tons and (2) marginal decline in cost of
production as against our expectation of flat cost of production/ton.
Cost of production declines marginally; silver production declines
HZ’s 3QFY11 net zinc metal cost of production excluding royalty declined 2% qoq to US$793/ton.
We, however, do not expect any further cost efficiencies till the strip ratio of Rampura Agucha
mine reduces meaningfully. Production and sales of refined zinc and lead were in line with our
estimate. Silver consumption for anode lining of new smelter led to decline in silver sales volumes
(down 19.9% qoq to 29.5 tons).
Raise zinc and lead price assumption
We increase our zinc price forecast by 8.7%, 7% and 4.4% to US$2,175/ton, US$2,300/ton and
US$2,350/ton for FY2011E, FY2012E and FY2013E. We expect zinc prices to remain range-bound
in 2011 but believe it has the potential to spike sharply in 2012 and beyond. Near-term prices may
be weighed by sharp production ramp-up leading to spike in inventory. LME Zinc inventory has
increased 17% in the last three months to around 710K tons (Refer Exhibit 6). However, prices
may increase starting 2012 led by likely decline in production and exhaustion of few large mines.
Retain BUY with a target price of Rs1,535 (Rs1,430 earlier)
HZ is a strong play on volume growth, ramp-up of profitable silver refinery and firm zinc prices.
The stock trades at 5.3X FY2012E EV/EBITDA and 10.7X FY2012E EPS. We increase our EPS
estimate by8.7%, 7.8% and 4.9% to Rs103.7, Rs125.5 and 140.7 for FY2011E, FY2012E and
FY2013E. Our earnings estimate for FY2012E may increase by 7%, if the zinc prices stay at current
levels. We raise our end-FY2012E target price to Rs1,535; we ascribe 6.5X to FY2012E EBITDA
with cash and cash equivalents contributing Rs477/share. Maintain BUY.
Lead smelter capacity expansion delayed; mine expansion on track
The 100 ktpa lead smelter at Dariba smelting complex will likely be commissioned by end-
FY2011E, a delay of more than six months and quite unusual for a Vedanta Group Company.
On the positive side, mine expansion at Sindesar Khurd (SK) is progressing in full swing. In
fact, the new 1.5 mtpa mill at SK has commenced trial-run production. The company is on
track to exit FY2012E with silver production capacity of 500 tons; we model silver
production of 250 tons in FY2012E.
HZ is also undertaking expansion of wind power generation capacity by 150 MW to 273.2
MW. This project will be executed in two phases. The first phase of 50 MW will be
completed by end FY2011E while the second phase of 100 MW is expected to be completed
by 2QFY12E. Also, the second unit of the 160 MW (2X 80 MW) captive power plant at
Dariba Smelting Complex has commenced trial runs during the quarter. The first unit was
synchronized in 1QFY11.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Zinc (HZ)
Metals & Mining
Solid quarter. HZ’s reported 3QFY11 EBITDA of Rs15.1 bn (+8.7% yoy, +33.9% qoq)
was ahead of our estimate of Rs13.1 bn. Cost of production declined marginally to
US$793/ton (excluding royalty). Expansion project, though a tad delayed, will strongly
contribute to FY2012E earnings. We raise our earnings estimates for FY2012E and
FY2013E by 7.8% and 4.9%, respectively on the back of revision in our zinc and lead
price forecast. Maintain BUY with a revised TP of Rs1,535 (Rs1,430 earlier).
Higher realizations and concentrate sales drive EBITDA and net income
HZ’s reported 3QFY11 EBITDA of Rs15.1 bn (+8.7% yoy, 33.9% qoq) was 15.3% higher than our
estimate of Rs13.1 bn. Net income of Rs12.9 bn was 17.1% ahead of our estimate. EBITDA and
net income growth was led by higher zinc and lead realization. Better-than-expected performance
can be attributed to (1) zinc concentrate sales of 18K tons and (2) marginal decline in cost of
production as against our expectation of flat cost of production/ton.
Cost of production declines marginally; silver production declines
HZ’s 3QFY11 net zinc metal cost of production excluding royalty declined 2% qoq to US$793/ton.
We, however, do not expect any further cost efficiencies till the strip ratio of Rampura Agucha
mine reduces meaningfully. Production and sales of refined zinc and lead were in line with our
estimate. Silver consumption for anode lining of new smelter led to decline in silver sales volumes
(down 19.9% qoq to 29.5 tons).
Raise zinc and lead price assumption
We increase our zinc price forecast by 8.7%, 7% and 4.4% to US$2,175/ton, US$2,300/ton and
US$2,350/ton for FY2011E, FY2012E and FY2013E. We expect zinc prices to remain range-bound
in 2011 but believe it has the potential to spike sharply in 2012 and beyond. Near-term prices may
be weighed by sharp production ramp-up leading to spike in inventory. LME Zinc inventory has
increased 17% in the last three months to around 710K tons (Refer Exhibit 6). However, prices
may increase starting 2012 led by likely decline in production and exhaustion of few large mines.
Retain BUY with a target price of Rs1,535 (Rs1,430 earlier)
HZ is a strong play on volume growth, ramp-up of profitable silver refinery and firm zinc prices.
The stock trades at 5.3X FY2012E EV/EBITDA and 10.7X FY2012E EPS. We increase our EPS
estimate by8.7%, 7.8% and 4.9% to Rs103.7, Rs125.5 and 140.7 for FY2011E, FY2012E and
FY2013E. Our earnings estimate for FY2012E may increase by 7%, if the zinc prices stay at current
levels. We raise our end-FY2012E target price to Rs1,535; we ascribe 6.5X to FY2012E EBITDA
with cash and cash equivalents contributing Rs477/share. Maintain BUY.
Lead smelter capacity expansion delayed; mine expansion on track
The 100 ktpa lead smelter at Dariba smelting complex will likely be commissioned by end-
FY2011E, a delay of more than six months and quite unusual for a Vedanta Group Company.
On the positive side, mine expansion at Sindesar Khurd (SK) is progressing in full swing. In
fact, the new 1.5 mtpa mill at SK has commenced trial-run production. The company is on
track to exit FY2012E with silver production capacity of 500 tons; we model silver
production of 250 tons in FY2012E.
HZ is also undertaking expansion of wind power generation capacity by 150 MW to 273.2
MW. This project will be executed in two phases. The first phase of 50 MW will be
completed by end FY2011E while the second phase of 100 MW is expected to be completed
by 2QFY12E. Also, the second unit of the 160 MW (2X 80 MW) captive power plant at
Dariba Smelting Complex has commenced trial runs during the quarter. The first unit was
synchronized in 1QFY11.
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