HSBC research: Hindustan Zinc: 3QFY11 results-zinc price-led strong performance

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Hindustan Zinc Ltd (HZ IN)
N: 3QFY11 results-zinc price-led strong performance 
34% q-o-q growth in EBITDA driven by zinc prices; In line
with HSBCe, above consensus estimates
Cost pressures dampen margins y-o-y; pressures to remain
Stay Neutral with TP of INR1,280
Strong numbers led by strong zinc prices; Cost push dampens margins y-o-y
 3Q sales at INR26.3b (up c20% q-o-q/ c17% y-o-y) following strong zinc prices (up
15% q-o-q/ 4% y-o-y) and q-o-q flattish zinc volumes. Realizations growth at 10%
was lower than increase in zinc prices following c4% appreciation of the INR.
Implied Zinc premiums at USD160/t were up c9% q-o-q but down 8% y-o-y
 EBITDA at INR15b (HSBCe INR14.5b/ consensus INR13.2b) was c34% higher
q-o-q. However on a y-o-y basis the growth was dampened a bit due to higher
stripping costs and coal/coke prices. Raw material prices were up 45% q-o-q.
Consequently margins were up 600bps q-o-q but were down 430bps y-o-y. With
rising coal prices, we expect the cost pressure to stay.
 NPAT at INR12.8b (HSBCe INR12.1b/ Consensus INR11.2b) was up 36% q-o-q and
12% y-o-y.
Expansion projects progressing well
 The company has decided to add 150MW capacity to its existing wind power
generation capacity of 123.2MW in two phases. It expects the first phase to be
complete in 4QFY11 and second phase by 2QFY12.
 The new 1.5mtpa mill at the silver rich Sindesar Khurd mine has commenced trial in
3Q. Management expects to ramp up the silver capacity to 500tpa by FY12.
HZ board has approved bonus shares in the ratio 1:1 and a further stock split in the
ratio 1:5.
We are Neutral on HZ given our house view of muted zinc prices. With our expectation
of incentive pricing returning in 2012, we currently prefer Aluminium to Zinc. We value
HZ at INR 1,280 on FY12e EV/EBITDA of 5.5x. Key positive (negative) risks include
favourable (unfavourable) zinc price movement and lower (higher) than expected raw
material costs.


Valuations & risks
We value HZ on FY12e EV/EBITDA of 5.5x. We retain our target price of INR1280 and Neutral rating.
Key positive (negative) risks include favourable (unfavourable) zinc price movement and lower (higher)
than expected raw material costs.