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Hindustan Zinc -Rules the roost amid higher LME prices…
Hindustan Zinc’s Q3FY11 results were better than our expectations.
Topline came in at | 2630 crore against our expectation of | 2384 crore
posting ~20% growth sequentially and ~17% YoY. The strong
performance was mainly due to higher base metal prices on the LME
and sale of surplus zinc concentrate (~17678 tonnes) in Q3FY11.
Operating margins improved ~620 bps sequentially. However, YoY
margins dipped ~430 bps mainly due to increased raw material cost,
higher stripping ratio and higher royalty payout. The PAT grew ~36%
QoQ and ~12% YoY as compared to our estimates of | 1036 crore
boosted by other income rising by ~| 75 crore. With rising LME prices
and expanded capacity coming in, the performance of the company will
improve, going forward. Thus, we have maintained our ADD rating on
the stock and revised our target price to | 1450.
ƒ Higher LME prices lead topline growth
Average LME zinc prices were $2331 for Q3FY11 (up ~5% YoY and
~15% QoQ) while LME lead prices were ~$2386 (up ~ 17% QoQ
and ~5% YoY). This led to topline growth of ~20% QoQ and ~16%
YoY. Lead volumes, however, declined ~14% QoQ at ~12,338
tonnes due to maintenance shutdown at the Ausmelt and ISF
smelters.
ƒ Amply rewarding shareholders
The company has announced the issue of bonus in the ratio of 1:1.
Also, in order to improve the liquidity, the board has also approved
a stock split of the existing equity share of | 10 each into five shares
of | 2 each.
Valuation
At the CMP of | 1339, the stock is discounting its FY12E EPS by 9.0x and
FY12E EV/EBITDA by 4.8x. Looking at the global peers, we feel that the
stock is trading near its fair value zone. We value the stock at 6x FY12E
EV/EBITDA and have arrived at a target price of | 1450/share. We have
assigned an ADD rating to the stock
Result Analysis
HZL reported better-than-expected numbers for Q3FY11 on the back of
improved blended realisations (zinc up ~ 10% QoQ and lead up ~13%
QoQ). The decline in lead volumes due to smelter shutdown was,
however, made up by surplus zinc and lead concentrate sales boosting
total income by ~| 234 crore QoQ. EBITDA margins declined ~430 bps
YoY due to higher raw material cost and stripping ratio, thus leading to an
increase in operating cost per tonne (including royalty) at ~$1308
compared to $1106 a year ago. PAT was also boosted by the other
income component to the tune of | 75 crore QoQ (up ~35% QoQ).
The company has reported sales of zinc concentrate of 17,678 tonnes and
lead concentrate of 7089 tonnes during Q3FY11, thus boosting the total
income by ~| 234 crore QoQ. The drop in silver sales by ~20% QoQ was,
however, made up by robust realisations (up ~34% QoQ and ~9% YoY),
thus contributing ~| 116 crore to the bottomline.
Expansion plans
• The company plans to add 150 MW capacity, thereby, taking its
total capacity to 273.2 MW. The project is expected to be
completed in two phases. In the first phase, 50 MW of capacity
will be added by the end of Q4FY11 whereas the balance 100 MW
will be added by the end of Q2FY12
• The company has commenced its operations at the Sindesar
Khurd mine (1.5 MTPA mill) and plans to exit FY12 with silver
production capacity of 500 tonnes. For this it plans to undertake
aggressive capacity ramp up
• In the quarter, the company has undertaken trial runs for its
second unit of 80 MW captive power plant at Dariba (160 MW)
• The commissioning of 100000 TPA lead smelter at Dariba has
been delayed by another quarter and is now expected to be
commissioned by Q4FY11
Outlook & earnings revision
Capacity ramp up in the zinc and lead segment by ~100,000 tonnes by
FY12 will likely improve the volumes, going forward. Also, silver as a byproduct is expected to contribute ~11% to the bottomline in FY11.
Further capacity ramp up to ~500,000 kg in FY12 will likely take the
contribution higher at ~20%. Apart form this, base metals price
assumptions of ~US$2331 for zinc in FY12 and US$2286 for lead in FY12
will keep our EBITDA margins estimates at a healthy 60% after taking into
consideration the ex-royalty cost/tonne at ~US$1100 being on the low
cost decile compared to other global miners.
We expect the earnings growth trajectory to continue its upward
momentum. Hence, we have revised our EPS estimates for FY12 to | 138
against our earlier estimates at | 128.
Price trend
Base metals prices have been on the upswing in the past three or four
months due to higher demand and lower inventory levels on the LME.
Currently, the LME zinc spot price is hovering in the range of
US$2421/tonne level. In case of lead, the LME price has risen to around
US$2656/ tonne level. Lead prices have particularly gained from good
demand recovery due to strong growth in the automobile segment across
the globe. In case of zinc, however, demand has recovered but due to a
surplus in inventories, prices are expected to remain range bound. We
believe the recent upsurge in base metals prices on the LME may sustain
for long and we should see a mild correction from higher levels in the
near term.
Valuations
At the CMP of | 1339, the stock is discounting its FY12E EPS by 9.0x and
FY12E EV/EBITDA by 4.8x. We believe that volume growth due to
expansion in zinc and lead and also increase in silver volumes would help
the company to witness better earnings in FY12E over FY11E. Looking at
the global peers, we feel that the stock is trading near its fair value zone.
We value the stock at 6x FY12E EV/EBITDA and have arrived at a target
price of | 1450/share. We have assigned an ADD rating to the stock. At
this point, we have not factored in the impact of the Anglo-American deal,
which is in the process of finalisation.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Zinc -Rules the roost amid higher LME prices…
Hindustan Zinc’s Q3FY11 results were better than our expectations.
Topline came in at | 2630 crore against our expectation of | 2384 crore
posting ~20% growth sequentially and ~17% YoY. The strong
performance was mainly due to higher base metal prices on the LME
and sale of surplus zinc concentrate (~17678 tonnes) in Q3FY11.
Operating margins improved ~620 bps sequentially. However, YoY
margins dipped ~430 bps mainly due to increased raw material cost,
higher stripping ratio and higher royalty payout. The PAT grew ~36%
QoQ and ~12% YoY as compared to our estimates of | 1036 crore
boosted by other income rising by ~| 75 crore. With rising LME prices
and expanded capacity coming in, the performance of the company will
improve, going forward. Thus, we have maintained our ADD rating on
the stock and revised our target price to | 1450.
ƒ Higher LME prices lead topline growth
Average LME zinc prices were $2331 for Q3FY11 (up ~5% YoY and
~15% QoQ) while LME lead prices were ~$2386 (up ~ 17% QoQ
and ~5% YoY). This led to topline growth of ~20% QoQ and ~16%
YoY. Lead volumes, however, declined ~14% QoQ at ~12,338
tonnes due to maintenance shutdown at the Ausmelt and ISF
smelters.
ƒ Amply rewarding shareholders
The company has announced the issue of bonus in the ratio of 1:1.
Also, in order to improve the liquidity, the board has also approved
a stock split of the existing equity share of | 10 each into five shares
of | 2 each.
Valuation
At the CMP of | 1339, the stock is discounting its FY12E EPS by 9.0x and
FY12E EV/EBITDA by 4.8x. Looking at the global peers, we feel that the
stock is trading near its fair value zone. We value the stock at 6x FY12E
EV/EBITDA and have arrived at a target price of | 1450/share. We have
assigned an ADD rating to the stock
Result Analysis
HZL reported better-than-expected numbers for Q3FY11 on the back of
improved blended realisations (zinc up ~ 10% QoQ and lead up ~13%
QoQ). The decline in lead volumes due to smelter shutdown was,
however, made up by surplus zinc and lead concentrate sales boosting
total income by ~| 234 crore QoQ. EBITDA margins declined ~430 bps
YoY due to higher raw material cost and stripping ratio, thus leading to an
increase in operating cost per tonne (including royalty) at ~$1308
compared to $1106 a year ago. PAT was also boosted by the other
income component to the tune of | 75 crore QoQ (up ~35% QoQ).
The company has reported sales of zinc concentrate of 17,678 tonnes and
lead concentrate of 7089 tonnes during Q3FY11, thus boosting the total
income by ~| 234 crore QoQ. The drop in silver sales by ~20% QoQ was,
however, made up by robust realisations (up ~34% QoQ and ~9% YoY),
thus contributing ~| 116 crore to the bottomline.
Expansion plans
• The company plans to add 150 MW capacity, thereby, taking its
total capacity to 273.2 MW. The project is expected to be
completed in two phases. In the first phase, 50 MW of capacity
will be added by the end of Q4FY11 whereas the balance 100 MW
will be added by the end of Q2FY12
• The company has commenced its operations at the Sindesar
Khurd mine (1.5 MTPA mill) and plans to exit FY12 with silver
production capacity of 500 tonnes. For this it plans to undertake
aggressive capacity ramp up
• In the quarter, the company has undertaken trial runs for its
second unit of 80 MW captive power plant at Dariba (160 MW)
• The commissioning of 100000 TPA lead smelter at Dariba has
been delayed by another quarter and is now expected to be
commissioned by Q4FY11
Outlook & earnings revision
Capacity ramp up in the zinc and lead segment by ~100,000 tonnes by
FY12 will likely improve the volumes, going forward. Also, silver as a byproduct is expected to contribute ~11% to the bottomline in FY11.
Further capacity ramp up to ~500,000 kg in FY12 will likely take the
contribution higher at ~20%. Apart form this, base metals price
assumptions of ~US$2331 for zinc in FY12 and US$2286 for lead in FY12
will keep our EBITDA margins estimates at a healthy 60% after taking into
consideration the ex-royalty cost/tonne at ~US$1100 being on the low
cost decile compared to other global miners.
We expect the earnings growth trajectory to continue its upward
momentum. Hence, we have revised our EPS estimates for FY12 to | 138
against our earlier estimates at | 128.
Price trend
Base metals prices have been on the upswing in the past three or four
months due to higher demand and lower inventory levels on the LME.
Currently, the LME zinc spot price is hovering in the range of
US$2421/tonne level. In case of lead, the LME price has risen to around
US$2656/ tonne level. Lead prices have particularly gained from good
demand recovery due to strong growth in the automobile segment across
the globe. In case of zinc, however, demand has recovered but due to a
surplus in inventories, prices are expected to remain range bound. We
believe the recent upsurge in base metals prices on the LME may sustain
for long and we should see a mild correction from higher levels in the
near term.
Valuations
At the CMP of | 1339, the stock is discounting its FY12E EPS by 9.0x and
FY12E EV/EBITDA by 4.8x. We believe that volume growth due to
expansion in zinc and lead and also increase in silver volumes would help
the company to witness better earnings in FY12E over FY11E. Looking at
the global peers, we feel that the stock is trading near its fair value zone.
We value the stock at 6x FY12E EV/EBITDA and have arrived at a target
price of | 1450/share. We have assigned an ADD rating to the stock. At
this point, we have not factored in the impact of the Anglo-American deal,
which is in the process of finalisation.
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