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EARNINGS REVIEW
Hindustan Zinc (HZNC.BO)
Neutral
In line with expectations: Silver ramp up on track
What surprised us
Hindustan Zinc (HZL) reported 1QFY12 net income of Rs14.9 bn (+68% yoy, -
16% qoq), largely in line with GS estimates and 9% above Reuters’ consensus.
Revenues were healthy at Rs28.2 bn (+45% yoy, -12% qoq). The strong
operating performance was led by improved realizations and higher volumes
for lead/zinc and increased contribution from silver (11% of revenues in 1Q12
vs. 6% in 1Q11). Mined metal production growth was impacted by an
unplanned 2-week shutdown at the Rampura Agucha mine. However, refined
zinc volumes were up 16% yoy, led by higher volumes from 210 ktpa Dariba
smelter (commissioned in March 2010). Silver volumes (including payable
silver) came at 64 tons, +31% qoq. EBITDA margin came in at 56%, up 522 bp
yoy, as higher volumes and realizations offset higher coal and stripping
costs—zinc metal costs at US$874 / ton (ex-royalty) were up 10% qoq. Margins
compressed by 388 bp qoq, in line with GSe, due to lower realizations
(zinc/lead LME down by 6%/2% qoq) and higher costs. The commissioning of
the 100 ktpa lead facility has started, with saleable production scheduled by
mid-2QFY12. The company plans to end FY12 with silver production capacity
of 500 tons with GS FY12E/FY13E production estimate at 285 tons/428 tons. In
FY13E, we expect silver to contribute 24% to EBITDA vs. 10% in FY11. As of
1QFY12, cash balance stood at Rs157.2 bn, i.e., 27% of current market cap.
What to do with the stock
We fine-tune FY12E-FY14E EPS. At 5.6X FY12E EV/EBITDA (mid-cycle of 4.3X),
we believe HZL’s strong earnings growth trajectory (23% FY11-FY14E CAGR)
is priced in. We prefer its parent Sterlite (STRL.BO; Buy; Rs166.20) to gain
exposure to HZL due to HZL’s low free float (about 5%) and limited liquidity.
Maintain Neutral and 12-m P/B-based TP of Rs140. Risks: Volatility in
commodity prices, delay in projects
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EARNINGS REVIEW
Hindustan Zinc (HZNC.BO)
Neutral
In line with expectations: Silver ramp up on track
What surprised us
Hindustan Zinc (HZL) reported 1QFY12 net income of Rs14.9 bn (+68% yoy, -
16% qoq), largely in line with GS estimates and 9% above Reuters’ consensus.
Revenues were healthy at Rs28.2 bn (+45% yoy, -12% qoq). The strong
operating performance was led by improved realizations and higher volumes
for lead/zinc and increased contribution from silver (11% of revenues in 1Q12
vs. 6% in 1Q11). Mined metal production growth was impacted by an
unplanned 2-week shutdown at the Rampura Agucha mine. However, refined
zinc volumes were up 16% yoy, led by higher volumes from 210 ktpa Dariba
smelter (commissioned in March 2010). Silver volumes (including payable
silver) came at 64 tons, +31% qoq. EBITDA margin came in at 56%, up 522 bp
yoy, as higher volumes and realizations offset higher coal and stripping
costs—zinc metal costs at US$874 / ton (ex-royalty) were up 10% qoq. Margins
compressed by 388 bp qoq, in line with GSe, due to lower realizations
(zinc/lead LME down by 6%/2% qoq) and higher costs. The commissioning of
the 100 ktpa lead facility has started, with saleable production scheduled by
mid-2QFY12. The company plans to end FY12 with silver production capacity
of 500 tons with GS FY12E/FY13E production estimate at 285 tons/428 tons. In
FY13E, we expect silver to contribute 24% to EBITDA vs. 10% in FY11. As of
1QFY12, cash balance stood at Rs157.2 bn, i.e., 27% of current market cap.
What to do with the stock
We fine-tune FY12E-FY14E EPS. At 5.6X FY12E EV/EBITDA (mid-cycle of 4.3X),
we believe HZL’s strong earnings growth trajectory (23% FY11-FY14E CAGR)
is priced in. We prefer its parent Sterlite (STRL.BO; Buy; Rs166.20) to gain
exposure to HZL due to HZL’s low free float (about 5%) and limited liquidity.
Maintain Neutral and 12-m P/B-based TP of Rs140. Risks: Volatility in
commodity prices, delay in projects
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