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Best is priced in
Better-than-expected 4QFY11 led by SK production ramp-up
Cost pressures resurface; costs to rise further in FY12
Cautious on base metal price outlook
Positives seem factored into the stock's premium valuations; HOLD
SK leads 4QFY11 beat
Hindustan Zinc’s (HZL) 4QFY11 PAT exceeded BNPP and Bloomberg
consensus estimates by 28-29%, as top line came in 15% above our estimate.
Lead concentrate premiums grew 397% q-q to USD4,237/tonne, with production
ramp-up at the silver-rich Sindesar Khurd (SK) mine.
Cost pressures resurface
On the flip side, cost pressures resurfaced
in 4QFY11 as opex grew 8% q-q to
USD1,215/tonne – 4% above our
estimate. We see further cost pressures in
FY12-13, as the stripping ratio at Agucha
remains high, the share of production from lower-grade/underground
mines rises further, initial work on underground mining at Agucha starts,
and coal cost pressures continue.
Cautious on the metal price outlook
BNP Paribas continues to be cautious on zinc as some mine closures
(Brunswick and Century) have been deferred and a deficit before 2013
seems even more unlikely. This, along with high stock levels, should
keep prices under check. Lead seems better placed, given a firm demand
trend and relatively inelastic supply. While we expect silver prices to
remain strong in the near term driven by surging investment demand, the
physical market is in surplus due to rising mine production. Thus, we
expect silver prices to start retreating in 2012. A key downside risk to our
metal price assumptions is a potential spike in interest rates given rising
inflationary pressure, which could lead to inventory unwinding.
Positives appear priced in; maintain HOLD
While HZL delivered strong volume growth in 2HFY11, we see little
scope for major gains as both Dariba zinc smelter and Agucha/SK mines
have already been ramped up. Any further delay in the start-up of Dariba
lead smelter is a downside risk to our estimates. Furthermore, metal
prices could come under pressure due to continued unrest in the Middle
East and a potential rise in interest rates. Thus, with the stock trading at
6.3x FY12E EV/EBITDA – 34% premium to global peers on Bloomberg
consensus estimates and a 40% premium to its 5-year historical average
– and downside risks to earnings, we believe the positives are already
priced in and the risk-reward looks unattractive. We raise our EPS 11%
for FY12E and 4% for FY13E, on the back of marginally better production
and higher metal prices forecasts. This raises our TP to INR146.00 (from
INR135.00), based on an unchanged target FY12E EV/EBITDA of 6.0x.
We note that spot metal prices are currently below our FY12
assumptions, implying 12%, 11% and 8% downside to our FY12E
EBITDA, EPS and fair value, respectively.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Best is priced in
Better-than-expected 4QFY11 led by SK production ramp-up
Cost pressures resurface; costs to rise further in FY12
Cautious on base metal price outlook
Positives seem factored into the stock's premium valuations; HOLD
SK leads 4QFY11 beat
Hindustan Zinc’s (HZL) 4QFY11 PAT exceeded BNPP and Bloomberg
consensus estimates by 28-29%, as top line came in 15% above our estimate.
Lead concentrate premiums grew 397% q-q to USD4,237/tonne, with production
ramp-up at the silver-rich Sindesar Khurd (SK) mine.
Cost pressures resurface
On the flip side, cost pressures resurfaced
in 4QFY11 as opex grew 8% q-q to
USD1,215/tonne – 4% above our
estimate. We see further cost pressures in
FY12-13, as the stripping ratio at Agucha
remains high, the share of production from lower-grade/underground
mines rises further, initial work on underground mining at Agucha starts,
and coal cost pressures continue.
Cautious on the metal price outlook
BNP Paribas continues to be cautious on zinc as some mine closures
(Brunswick and Century) have been deferred and a deficit before 2013
seems even more unlikely. This, along with high stock levels, should
keep prices under check. Lead seems better placed, given a firm demand
trend and relatively inelastic supply. While we expect silver prices to
remain strong in the near term driven by surging investment demand, the
physical market is in surplus due to rising mine production. Thus, we
expect silver prices to start retreating in 2012. A key downside risk to our
metal price assumptions is a potential spike in interest rates given rising
inflationary pressure, which could lead to inventory unwinding.
Positives appear priced in; maintain HOLD
While HZL delivered strong volume growth in 2HFY11, we see little
scope for major gains as both Dariba zinc smelter and Agucha/SK mines
have already been ramped up. Any further delay in the start-up of Dariba
lead smelter is a downside risk to our estimates. Furthermore, metal
prices could come under pressure due to continued unrest in the Middle
East and a potential rise in interest rates. Thus, with the stock trading at
6.3x FY12E EV/EBITDA – 34% premium to global peers on Bloomberg
consensus estimates and a 40% premium to its 5-year historical average
– and downside risks to earnings, we believe the positives are already
priced in and the risk-reward looks unattractive. We raise our EPS 11%
for FY12E and 4% for FY13E, on the back of marginally better production
and higher metal prices forecasts. This raises our TP to INR146.00 (from
INR135.00), based on an unchanged target FY12E EV/EBITDA of 6.0x.
We note that spot metal prices are currently below our FY12
assumptions, implying 12%, 11% and 8% downside to our FY12E
EBITDA, EPS and fair value, respectively.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
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