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Hindustan Zinc---------------------------------------------------------------- Maintain OUTPERFORM
Zinc weakness shortlived; HZL offers 10% FCFE on current spot
Zinc has sharply underperformed other base metals since April
(Figure 1) and is down about 10% YTD. This is partly due to
financial support playing a bigger role near term for Zinc than for
other metals (oversupply in 2011 but shortages from 2012).
● A more important reason though has been a slowdown in global
auto production (transport is 25% of zinc end-use). Reasons: 1)
China slowdown (ownership restrictions, rising rates, etc); and 2)
disruptions in the global auto supply chain (Japanese earthquake).
● CS China autos analyst expects a seasonal pick-up in 3Q in
China, and CS global autos team expects Japanese automakers
to recover production faster than earlier guidance, e.g., Toyota
hopes to reach 70% utilisation in June 2011 itself.
● Demand is not expected to be a constraint as inventories are at
very low levels (Figure 2: US auto dealerships are now 9%
understocked, as the Japanese brands are 23% understocked).
● With FCF yield at ~10% on current spot prices of zinc and silver,
and zinc shortages expected to start from 2012, HZL is our
preferred metals pick in India. We maintain our OUTPERFORM
and target price of Rs173.
Zinc’s underperformance overpricing concerns
Zinc has sharply underperformed other base metals since April
(Figure 1) and is down about 10%, whereas other base metals have
done better. This is partly due to financial support playing a bigger role
near term for Zinc than for other metals: although we have remained
bullish on zinc due to expected shortages starting in 2012-13, we
expect a surplus in 2011. Some have ascribed this weakness to rising
inventories – but zinc is not isolated among base metals in that, and
the trend has not changed.
A more important reason though has been a slowdown in global auto
production – transport is after all one-fourth of zinc end-use. This
slowdown has been driven by: 1) a slowdown in China (due to
ownership restrictions, rising rates, withdrawal of incentive schemes),
and 2) disruptions in the global auto supply chain after the Japan
earthquake. Japanese automakers, in particular, have been taking
sharp production cuts. US auto dealerships are now 9% understocked
(Figure 2), primarily as the Japanese brands are 23% understocked,
and Japanese cars are actually 32% understocked.
The CS global autos team expects Japanese automakers to recover
production faster than earlier guidance: Toyota, for example, has
brought forward the scheduled start of production recovery from the
earlier July 2011 in Japan and August 2011 for overseas. It now
expects 70% utilisation in June 2011 (currently 30-50%) – with
inventories at very low levels, demand is not expected to be a
constraint. The re-stock can actually drive stronger than normal
demand growth. Similarly, CS China autos analyst also expects a
seasonal recovery in 3Q.
HZL remains our preferred pick in Indian metals
HZL has underperformed in the past month, largely as zinc and silver
prices have fallen. We must point out that we are modelling silver
volumes of 280 kt in FY12 (company guidance is 350-400 kt). Silver
producers trade at 15-20x and we are far more conservative. We
estimate FCF yield at ~10% on current spot prices of zinc and silver.
HZL remains our preferred pick in the metals space
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Zinc---------------------------------------------------------------- Maintain OUTPERFORM
Zinc weakness shortlived; HZL offers 10% FCFE on current spot
Zinc has sharply underperformed other base metals since April
(Figure 1) and is down about 10% YTD. This is partly due to
financial support playing a bigger role near term for Zinc than for
other metals (oversupply in 2011 but shortages from 2012).
● A more important reason though has been a slowdown in global
auto production (transport is 25% of zinc end-use). Reasons: 1)
China slowdown (ownership restrictions, rising rates, etc); and 2)
disruptions in the global auto supply chain (Japanese earthquake).
● CS China autos analyst expects a seasonal pick-up in 3Q in
China, and CS global autos team expects Japanese automakers
to recover production faster than earlier guidance, e.g., Toyota
hopes to reach 70% utilisation in June 2011 itself.
● Demand is not expected to be a constraint as inventories are at
very low levels (Figure 2: US auto dealerships are now 9%
understocked, as the Japanese brands are 23% understocked).
● With FCF yield at ~10% on current spot prices of zinc and silver,
and zinc shortages expected to start from 2012, HZL is our
preferred metals pick in India. We maintain our OUTPERFORM
and target price of Rs173.
Zinc’s underperformance overpricing concerns
Zinc has sharply underperformed other base metals since April
(Figure 1) and is down about 10%, whereas other base metals have
done better. This is partly due to financial support playing a bigger role
near term for Zinc than for other metals: although we have remained
bullish on zinc due to expected shortages starting in 2012-13, we
expect a surplus in 2011. Some have ascribed this weakness to rising
inventories – but zinc is not isolated among base metals in that, and
the trend has not changed.
A more important reason though has been a slowdown in global auto
production – transport is after all one-fourth of zinc end-use. This
slowdown has been driven by: 1) a slowdown in China (due to
ownership restrictions, rising rates, withdrawal of incentive schemes),
and 2) disruptions in the global auto supply chain after the Japan
earthquake. Japanese automakers, in particular, have been taking
sharp production cuts. US auto dealerships are now 9% understocked
(Figure 2), primarily as the Japanese brands are 23% understocked,
and Japanese cars are actually 32% understocked.
The CS global autos team expects Japanese automakers to recover
production faster than earlier guidance: Toyota, for example, has
brought forward the scheduled start of production recovery from the
earlier July 2011 in Japan and August 2011 for overseas. It now
expects 70% utilisation in June 2011 (currently 30-50%) – with
inventories at very low levels, demand is not expected to be a
constraint. The re-stock can actually drive stronger than normal
demand growth. Similarly, CS China autos analyst also expects a
seasonal recovery in 3Q.
HZL remains our preferred pick in Indian metals
HZL has underperformed in the past month, largely as zinc and silver
prices have fallen. We must point out that we are modelling silver
volumes of 280 kt in FY12 (company guidance is 350-400 kt). Silver
producers trade at 15-20x and we are far more conservative. We
estimate FCF yield at ~10% on current spot prices of zinc and silver.
HZL remains our preferred pick in the metals space
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