Hindustan Zinc -- Can it grow from here on?::Macquarie Research,

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Hindustan Zinc
Can it grow from here on?
Event
 1Q FY12 result – beats expectations: Hindustan Zinc (HZ) reported 1Q
FY12 earnings that were 10% ahead of our estimates, driven by lead
concentrate sales and a lower tax rate. We have marginally increased
earnings and also lifted our target price to Rs146 from Rs136. The stock
seems fairly valued at the moment and we think clarity on future growth
potential is required to see a rerating. Maintain Neutral.
Impact
 Strong results: Net sales at Rs28.2bn for 1Q FY12 grew by 45% YoY but
were down 12% QoQ, as LME zinc prices declined 7% sequentially and
volumes declined due to a shutdown at the Rampur Agucha mine. EBITDA
was Rs15.7bn, which was up 57% YoY although down 19% QoQ, resulting in
an EBITDA margin of 56%, as compared to the 60% it reported last quarter.
Reported net profit grew by 68% to Rs14.9bn in 1Q, compared with Rs17.7bn
the previous quarter.
 Upgrading earnings, but not much operationally: We have increased our
earning estimates for HZ on account of a lower tax rate post company guidance
and higher other income for FY12. For FY13 and FY14 we have also built in
capacity expansion at the company’s SK mine to 2mtpa, from earlier 1.5mtpa.
 Searching for growth: One of the key concerns we have is lack of growth
visibility. Although the company is sitting on a substantial and ever-growing
pile of cash, its growth options through an inorganic route have been
restrained by the Board. This leaves only an organic growth option, for which
we think the company has limited scope unless it makes a good-sized
resource discovery. It is running a detailed exploration programme, but we do
not see any near-term catalyst.
 Royalty sharing on CSR –although watered down, it remains a risk: The
new draft of the mining bill talks about 100% royalty sharing for traditional land
owners. This directly affects HZ and we think could erase 11% of its FY12
earnings; thus, it is a key overhang on the stock.
Earnings and target price revision
 We are increasing our FY12 and FY13 estimates by 7% and 6%, respectively.
We are also increasing our target price to Rs146 from Rs136.
Price catalyst
 12-month price target: Rs146.00 based on a PER methodology.
 Catalyst: Volatility in commodity prices and increase in costs.
Action and recommendation
 Maintain Neural: While HZ is approaching our target price, we will still wait
for a more attractive entry point. We expect the stock to remain range-bound,
as we have factored in growth in earnings.
 Trading in line with peers: Global zinc companies are trading at 9.2x and
8.0x PER earnings estimates for FY12 and FY13, respectively, as compared
with 8.5x and 8.3x for Hindustan Zinc. This leaves little room for rerating for
Hindustan Zinc, in our view