RBS:: Hindustan Zinc -3QFY11 results better than expected

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Hindustan Zinc 
From zinc to silver
HZL reported better-than-expected 3QFY11 earnings. We expect timely lead and,
more importantly, silver capacity ramp-up to be key earnings drivers going
forward. We have lowered our FY11/FY12F earnings by 11/10% but raised our TP
to Rs1525 based on peer valuations. HZL is among our top picks in the sector.
3QFY11 results were better than our estimates on the back of strong realisations
Hindustan Zinc (HZL) reported 3QFY11 EBITDA at Rs14.8bn (+9%yoy and +36%qoq),
driven by strong realisations despite flat qoq volumes. Zinc and lead prices were up 14.5%
and 16.7% respectively during the quarter. Net earnings, at Rs12.9bn (+12%yoy and
35.9%qoq), were better than our expectation of Rs11.4bn, helped by higher other income.
Lead volumes, at 12,338 tonnes (-15%qoq and -37%yoy) were impacted by maintenance
shutdowns and were below expectations. Also, silver sales, at 29,524kgs, were down 20%
both qoq and yoy.
Zinc, lead and silver outlook
Zinc was among the worst performing base metals in 2010 on the back of a large surplus,
which we expect to continue in 2011. Lack of new mine supply, mine exhaustion and only
limited growth in scrap generation are set to limit lead supply growth. Silverís fundamentals
are driven by substantial investor demand in the form of ETFs, and this trend could continue.
We used FY12F zinc, lead and silver prices of US$2398/tonne, US$2586/tonne and
US$20.8/oz, respectively, in our assumptions compared with current prices of
US$2450/tonne, US$2650/tonne and US$28/oz.
Lower FY11/12 earnings estimates. Maintain Buy with revised TP of Rs1,525
We have lowered our FY11/12 earnings estimates by 11% and 10% on account of i) lowerthan-expected lead output, and ii) mining cost escalations. We have cut our lead volume
forecast for FY12 by 14% on account of slow smelter ramp-up. We note that in the absence
of any new capex programmes, cash per share could surge from Rs308 in FY11F to Rs679
by FY13F. We have valued HZL at 5.7x FY12F EV/EBITDA, (4.9x earlier), based on peer
average multiples, and derive a TP of Rs1,525/share. Slower capacity ramp-up and weak
underlying commodity prices are the key risks to our forecasts and target price.