Buy Hindustan Zinc: Silver and lead to grow faster  Motilal Oswal

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Silver and lead to grow faster
 We expect zinc production to grow at a CAGR of 6.2% to 800k tons over FY11-
FY13 due to recent expansion of zinc refining capacity. The company had expanded
its smelting capacity to 879ktpa in mid-2010. In 3QFY11, its smelters achieved
highest production of 178k tons, implying annualized production of 713k tons.
 Lead production will grow at a CAGR of 41% to 120k tons over FY11-FY13. A new
lead smelter, with capacity of 100ktpa is expected to be commissioned in 4QFY11.
Since incremental internal requirement will rise at just 6%, more lead will be available
for third party sales.
 Silver production will grow at a CAGR of 44% to 324 tons over FY11-FY13. Silver
capacity will be expanded to 500tpa along with the lead smelter. Sindesur Kurd
(SK) mine is rich in silver. SK mine produced 0.7m tons in FY11, while the current
production rate has already reached 1.2mtpa. In FY12, SK mine is expected to
produce 1.5m tons and 2m tons in FY13. Silver production is expected to more
than double to 400 tons in FY12, which is ahead of 270 tons in our estimates.
 Mine production too is being ramped up to match the refining capacity. Post
expansion of Rampur Agucha mines, the total mine capacity has been increased
to 8.6mtpa. During FY10, the ore production was 7.1m tons. SK mine will be
further expanded to 1.2mtpa. Sale of zinc and lead concentrates has been
discontinued but for exceptional situations.
 The cost of production remains one of the lowest in world. Including royalties, the
cost of production of zinc has been US$800-1,000/ton in the last five years.
 Although its 100ktpa lead smelter is delayed again by a quarter, second unit of
80MW (in 160MW CPP) has commenced trail runs in 3QFY11.
 The company has recently announced addition of 150MW capacity to its existing
123.2MW power generation capacity, with an additional capex of Rs8.65b in two
phases. The first phase of 50MW will be commissioned by 1QFY12 while the
balance 50MW will be commissioned by 3QFY12.
 Cash and equivalents stand at Rs131b, of which Rs6.6b is invested in debt mutual
funds. Recently, the company announced a bonus of 1:1 and stock split of 1:5.
 We remain positive on Hindustan Zinc due to strong volume growth of zinc metal
and sharper growth in lead and silver production over the next few years. The stock
trades at 10.3x FY12E EPS and an EV of 5.8x FY12E EBITDA, assuming zinc
and lead prices of US$2,200/ton. Every US$100/ton change in LME prices impacts
EPS by 5-6%. Maintain Buy.