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Hindustan Zinc – Best-in class growth story, fairly valued; Neutral
Investment thesis
We remove the Not Rated designation on Hindustan Zinc (HALC.BO) and
rate the stock Neutral with a 12-month P/B-based target price of Rs140,
implying 7% potential upside. We prefer its parent Sterlite to gain
exposure to HZL due to HZL’s low free float (about 5%) and limited
liquidity.
World’s largest integrated producer with long mine life
HZL is now the world’s largest integrated (mining/smelting) producer
with zinc-lead smelting capacity of over 1 mn tpa. With the imminent
commissioning and expected ramp-up of its new lead smelter, we
expect a 45% CAGR volume growth in lead over the next 2 years. Its rich
reserve and resource base of 313 mn tpa, with an ongoing and
successful drilling and exploration track record, gives it a long mine life
of over 31 years at expanded capacity.
Top quartile of the cost curve
With FY11 cost of production of US$990/T (US$808/T excluding royalty),
Hindustan Zinc is among the world’s lowest cost producers of zinc. It
benefits immensely from a rich reserve base with high zinc grade and
high recovery rates at its smelting facilities. Switching over to captive
power sources has also added to this strength.
Silver mine ramp-up – to boost cash flows
The Sindesar Khurd mine of HZL, with rich silver reserves, is currently
being ramped-up, and the company expects to exit FY12 with a silver
production rate of 500 tpa. As a by-product, silver revenues flow down
to the EBITDA as there are no associated costs. We expect silver to
account for 16% of EBITDA in FY12E and 22% in FY113E.
Strong balance sheet
HZL is a debt free company with cash of over US$3bn at end FY11.
Risk-reward balanced – after recent outperformance
We expect a 21% EPS CAGR over FY11-13E on the back of volume
growth in zinc, lead and silver. We tweak FY12-FY13 EPS estimates by
up to 2.5% after commodity price and cost revisions. We also introduce
our FY14E EPS of Rs21.51. However, after recent outperformance, the
stock is now trading at 5.2X FY12E EV/EBITDA, above its mid-cycle of
4.3X, and valuations appear reasonable, in our view, based on its strong
ROE and EPS growth. We assign a target FY12E P/B multiple of 2.2X for
its FY12E ROE of 24% and rate the stock Neutral.
Risks: Upside risk: (1) strong commodity price; Downside risk: (1) delays
in growth projects; (2) low free float and liquidity.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Zinc – Best-in class growth story, fairly valued; Neutral
Investment thesis
We remove the Not Rated designation on Hindustan Zinc (HALC.BO) and
rate the stock Neutral with a 12-month P/B-based target price of Rs140,
implying 7% potential upside. We prefer its parent Sterlite to gain
exposure to HZL due to HZL’s low free float (about 5%) and limited
liquidity.
World’s largest integrated producer with long mine life
HZL is now the world’s largest integrated (mining/smelting) producer
with zinc-lead smelting capacity of over 1 mn tpa. With the imminent
commissioning and expected ramp-up of its new lead smelter, we
expect a 45% CAGR volume growth in lead over the next 2 years. Its rich
reserve and resource base of 313 mn tpa, with an ongoing and
successful drilling and exploration track record, gives it a long mine life
of over 31 years at expanded capacity.
Top quartile of the cost curve
With FY11 cost of production of US$990/T (US$808/T excluding royalty),
Hindustan Zinc is among the world’s lowest cost producers of zinc. It
benefits immensely from a rich reserve base with high zinc grade and
high recovery rates at its smelting facilities. Switching over to captive
power sources has also added to this strength.
Silver mine ramp-up – to boost cash flows
The Sindesar Khurd mine of HZL, with rich silver reserves, is currently
being ramped-up, and the company expects to exit FY12 with a silver
production rate of 500 tpa. As a by-product, silver revenues flow down
to the EBITDA as there are no associated costs. We expect silver to
account for 16% of EBITDA in FY12E and 22% in FY113E.
Strong balance sheet
HZL is a debt free company with cash of over US$3bn at end FY11.
Risk-reward balanced – after recent outperformance
We expect a 21% EPS CAGR over FY11-13E on the back of volume
growth in zinc, lead and silver. We tweak FY12-FY13 EPS estimates by
up to 2.5% after commodity price and cost revisions. We also introduce
our FY14E EPS of Rs21.51. However, after recent outperformance, the
stock is now trading at 5.2X FY12E EV/EBITDA, above its mid-cycle of
4.3X, and valuations appear reasonable, in our view, based on its strong
ROE and EPS growth. We assign a target FY12E P/B multiple of 2.2X for
its FY12E ROE of 24% and rate the stock Neutral.
Risks: Upside risk: (1) strong commodity price; Downside risk: (1) delays
in growth projects; (2) low free float and liquidity.
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