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Hindustan Zinc (HZNC.BO)
Good News Largely Priced In
Hold maintained — HZL will benefit from 1) 4-16% volume growth in FY12-13; 2)
robust silver volumes/prices; 3) zinc/lead LME prices expected to stay around current
levels; and 4) $2.9bn of net cash in a high-yielding environment. The stock has rallied
19% in the past 6 months largely on the back of a 13-34% rise in zinc/lead prices,
which we see as reflecting most positives. We might reconsider our Hold (2L) rating,
ceteris paribus, should the shares see a 10-15% price correction.
Raising estimates/TP — We increase FY12-13 PAT by 3-16% incorporating 1) a 2-8%
hike in zinc/lead LME prices; 2) revised Rs/US$ rates − 45.9 vs. 43.9 in FY12 and 44.4
vs. 43.0 in FY13; and 3) slightly higher zinc volumes. This is offset to an extent by an 8-
19% cut in lead/silver volumes (due to plant delays) and higher power (coal) costs. We
raise our TP to Rs152 (from Rs131) based on FY12 PE of 10x (18-month average). At
our TP, HZL would trade at an EV/EBITDA of 5.4x.
Zinc outlook: relatively steady — According to our global commodities view, zinc has
the weakest near-term fundamentals relative to the other major base metals. We
estimate FY12 zinc prices to average $2,478/t and lead $2,575/t – in line with recent
trends in LME prices. Our estimate for 2011 and 2012 is for a surplus of nearly 250-
400kt. Longer term, however, a potential shortage of mine supply looms in the second
half of the decade, with a deficit expected in 2015.
Lead - slightly delayed — HZL’s current zinc-lead capacity is 964ktpa. Its 100ktpa
lead smelter is expected to be commissioned by 1Q FY12, which will make it among
the largest integrated zinc-lead smelters globally (1.06mtpa). The silver-rich Sindesar
Khurd mine ramp-up will help exit FY12 with a silver production capacity of 500 tonnes.
Wind power capacity is being enhanced by 150MW by end FY12 – taking total wind
power capacity to 273MW.
Sensitivity — A 5% change in zinc-lead prices would impact FY12 PAT by 6%
Hindustan Zinc
Company description
Hindustan Zinc Ltd (HZL) is India's only integrated zinc producer. It has open-pit
mines for lead-zinc ore at Rampura Agucha and two underground mines - Rajpura
Dariba and Zawar. All are in Rajasthan in Northwest India. Expansion of the
Rampura Agucha mine from 5 to 6mtpa is complete. The Sindesar Khurd mine
(1.5mtpa) which is rich in silver will be fully commissioned in FY12. The Kayar mine
(0.3mtpa) is expected by end-2013. HZL has zinc capacity of 879ktpa, lead capacity
of 85ktpa and power capacity of 370MW. The 100ktpa lead expansion (to 185ktpa)
is expected to be completed by 1QFY12. Upon completion, HZL will have total
integrated zinc-lead capacity of 1.064mtpa with fully integrated mining and captive
power generation capacities, which will make it one of the world's largest integrated
zinc-lead producers. Wind power capacity is being increased during FY12 by
150MW – taking its wind power capacity to 273MW. One of HZL's biggest
advantages is the Rampura Agucha mines, which meets ~75% of its concentrate
requirements. HZL expects to increase silver capacity from current levels of ~150tpa
to ~500tpa (we expect sales of 320tpa in FY12 and 400tpa in FY13) in the form of
silver and silver bearing residue. A large part of this increase would be from the
Sindesar Khurd mine which is rich in silver.
Investment strategy
We rate HZL shares Hold/Low Risk (2L) with a target price of Rs152. HZL will
benefit from: 1) 4-16% volume growth in FY12 and 4% in FY13; 2) higher silver
volumes/prices; 3) zinc-lead LME prices expected to stay around current levels; and
4) $2.9bn net cash in a high-yielding environment. HZL has rallied 19% in the past 6
months (largely on the back of a 13-34% rise in zinc/lead prices) and outperformed
the Sensex by 23%. According to our global commodities view, zinc has the
weakest near-term fundamentals relative to the other major base metals. We
estimate FY12 zinc prices to average $2,478/t and lead $2,575/t – in line with recent
trends in LME prices. China is likely to be a net exporter in 2011 vs. being a net
importer. Our estimate for 2011 and 2012 is for a surplus of nearly 250-400kt.
Longer term, however, a potential shortage of mine supply looms in the second half
of the decade, with a deficit expected in 2015. We might reconsider our Hold (2L)
rating, ceteris paribus, should the shares see a 10-15% price correction.
Valuation
We set our target price for HZL at Rs152, by applying a P/E of 10x to our estimate
of FY12 earnings. We use P/E as our preferred valuation parameter for HZL, as we
believe that stocks such as HZL are largely driven by commodity price trends. Our
target multiple is set in line with HZL's average multiple during the past 18 months,
which we think should sustain going forward. While there are no direct global
comparables, our target multiple is at the low end of the 9-12x trading range for
companies such as Xstrata, Korea Zinc and Teck Resources (using consensus
estimates) - which have a presence in zinc. At our TP, HZL would trade at a FY12E
EV/EBITDA of 5.4x.
Risks
We assign a Low Risk rating to Hindustan Zinc shares, based on the rating
suggested by our quantitative risk-rating system, which tracks 260-day historical
share price volatility. Upside risks that could cause the shares to continue to trade
above our target price include: (1) Higher-than-expected zinc, lead and silver prices;
(2) Rupee depreciation; (3) Higher volumes than we expect; (4) Increase in
zinc/lead import duty. Downside risks to our target price include: (1) Weakness in
prices of zinc, lead and silver; (2) Lower volumes in its product sales as estimated;
(3) Mine disruption at Rampura Agucha, on which HZL is largely dependent for low
cost ore; (4) Rupee appreciation; (5) Higher royalty rates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Zinc (HZNC.BO)
Good News Largely Priced In
Hold maintained — HZL will benefit from 1) 4-16% volume growth in FY12-13; 2)
robust silver volumes/prices; 3) zinc/lead LME prices expected to stay around current
levels; and 4) $2.9bn of net cash in a high-yielding environment. The stock has rallied
19% in the past 6 months largely on the back of a 13-34% rise in zinc/lead prices,
which we see as reflecting most positives. We might reconsider our Hold (2L) rating,
ceteris paribus, should the shares see a 10-15% price correction.
Raising estimates/TP — We increase FY12-13 PAT by 3-16% incorporating 1) a 2-8%
hike in zinc/lead LME prices; 2) revised Rs/US$ rates − 45.9 vs. 43.9 in FY12 and 44.4
vs. 43.0 in FY13; and 3) slightly higher zinc volumes. This is offset to an extent by an 8-
19% cut in lead/silver volumes (due to plant delays) and higher power (coal) costs. We
raise our TP to Rs152 (from Rs131) based on FY12 PE of 10x (18-month average). At
our TP, HZL would trade at an EV/EBITDA of 5.4x.
Zinc outlook: relatively steady — According to our global commodities view, zinc has
the weakest near-term fundamentals relative to the other major base metals. We
estimate FY12 zinc prices to average $2,478/t and lead $2,575/t – in line with recent
trends in LME prices. Our estimate for 2011 and 2012 is for a surplus of nearly 250-
400kt. Longer term, however, a potential shortage of mine supply looms in the second
half of the decade, with a deficit expected in 2015.
Lead - slightly delayed — HZL’s current zinc-lead capacity is 964ktpa. Its 100ktpa
lead smelter is expected to be commissioned by 1Q FY12, which will make it among
the largest integrated zinc-lead smelters globally (1.06mtpa). The silver-rich Sindesar
Khurd mine ramp-up will help exit FY12 with a silver production capacity of 500 tonnes.
Wind power capacity is being enhanced by 150MW by end FY12 – taking total wind
power capacity to 273MW.
Sensitivity — A 5% change in zinc-lead prices would impact FY12 PAT by 6%
Hindustan Zinc
Company description
Hindustan Zinc Ltd (HZL) is India's only integrated zinc producer. It has open-pit
mines for lead-zinc ore at Rampura Agucha and two underground mines - Rajpura
Dariba and Zawar. All are in Rajasthan in Northwest India. Expansion of the
Rampura Agucha mine from 5 to 6mtpa is complete. The Sindesar Khurd mine
(1.5mtpa) which is rich in silver will be fully commissioned in FY12. The Kayar mine
(0.3mtpa) is expected by end-2013. HZL has zinc capacity of 879ktpa, lead capacity
of 85ktpa and power capacity of 370MW. The 100ktpa lead expansion (to 185ktpa)
is expected to be completed by 1QFY12. Upon completion, HZL will have total
integrated zinc-lead capacity of 1.064mtpa with fully integrated mining and captive
power generation capacities, which will make it one of the world's largest integrated
zinc-lead producers. Wind power capacity is being increased during FY12 by
150MW – taking its wind power capacity to 273MW. One of HZL's biggest
advantages is the Rampura Agucha mines, which meets ~75% of its concentrate
requirements. HZL expects to increase silver capacity from current levels of ~150tpa
to ~500tpa (we expect sales of 320tpa in FY12 and 400tpa in FY13) in the form of
silver and silver bearing residue. A large part of this increase would be from the
Sindesar Khurd mine which is rich in silver.
Investment strategy
We rate HZL shares Hold/Low Risk (2L) with a target price of Rs152. HZL will
benefit from: 1) 4-16% volume growth in FY12 and 4% in FY13; 2) higher silver
volumes/prices; 3) zinc-lead LME prices expected to stay around current levels; and
4) $2.9bn net cash in a high-yielding environment. HZL has rallied 19% in the past 6
months (largely on the back of a 13-34% rise in zinc/lead prices) and outperformed
the Sensex by 23%. According to our global commodities view, zinc has the
weakest near-term fundamentals relative to the other major base metals. We
estimate FY12 zinc prices to average $2,478/t and lead $2,575/t – in line with recent
trends in LME prices. China is likely to be a net exporter in 2011 vs. being a net
importer. Our estimate for 2011 and 2012 is for a surplus of nearly 250-400kt.
Longer term, however, a potential shortage of mine supply looms in the second half
of the decade, with a deficit expected in 2015. We might reconsider our Hold (2L)
rating, ceteris paribus, should the shares see a 10-15% price correction.
Valuation
We set our target price for HZL at Rs152, by applying a P/E of 10x to our estimate
of FY12 earnings. We use P/E as our preferred valuation parameter for HZL, as we
believe that stocks such as HZL are largely driven by commodity price trends. Our
target multiple is set in line with HZL's average multiple during the past 18 months,
which we think should sustain going forward. While there are no direct global
comparables, our target multiple is at the low end of the 9-12x trading range for
companies such as Xstrata, Korea Zinc and Teck Resources (using consensus
estimates) - which have a presence in zinc. At our TP, HZL would trade at a FY12E
EV/EBITDA of 5.4x.
Risks
We assign a Low Risk rating to Hindustan Zinc shares, based on the rating
suggested by our quantitative risk-rating system, which tracks 260-day historical
share price volatility. Upside risks that could cause the shares to continue to trade
above our target price include: (1) Higher-than-expected zinc, lead and silver prices;
(2) Rupee depreciation; (3) Higher volumes than we expect; (4) Increase in
zinc/lead import duty. Downside risks to our target price include: (1) Weakness in
prices of zinc, lead and silver; (2) Lower volumes in its product sales as estimated;
(3) Mine disruption at Rampura Agucha, on which HZL is largely dependent for low
cost ore; (4) Rupee appreciation; (5) Higher royalty rates.
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