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Hindustan Zinc (HZNC.BO)
Downgrade to Sell: Not Enough Zing
Downgrade to Sell — HZL’s stock has rallied 37% over the last year, in line with LME
prices: zinc up 31%; lead 47%. We expect a zinc surplus in 2011 and 2012 and expect
LME prices to remain range-bound over 6-12 months. We cut estimates/TP marginally
and downgrade to Sell based on our zinc outlook and full valuations. There is further
downside risk to FY13 PAT (14%) as HZL suffers the biggest negative impact among
non-ferrous stocks if the draft Mining Bill is passed in its current form.
Estimates cut — We reduce FY12-13 PAT by 7% - 1) lower volumes: Zawar mines in
forest areas awaiting clearances, lead smelter delays; 2) higher costs based on FY11
actuals, coal price trends. The PAT cut is partly offset by higher other income and lower
tax rate. We cut TP to Rs136 and continue to value HZL at 10x PE (18-month avg.) but
roll forward to Sep12 (from Jun12). At our TP HZL would trade at 5.6x EV/EBITDA.
Zinc outlook — Zinc prices have recovered 13% in the past month on short covering.
Zinc can only add to recent gains if Chinese output is cut or global economic conditions
recover better than expected. Our commodities team feels zinc has the weakest nearterm fundamentals relative to the other metals. We estimate ~250kt surplus for 2011
and 2012. Longer term, a potential supply shortage looms, with a deficit in 2014.
1Q FY12 outperforms expectations — HZL’s PAT at Rs15bn (+68% yoy) came in
30% above Citi est. on higher zinc volumes, concentrate sales, higher other income
and lower tax rates. EBITDA margin (excl. other income) was 56% vs 51% in 1QFY11
and 60% in 4QFY11. Zinc + lead volumes grew 16%, zinc LME was up 11% and lead
31%. HZL benefited from high silver content in the surplus lead concentrate sold. There
was marginal production loss at Rampura Agucha due to a shutdown (unlikely to
impact full-year volumes).
Sensitivity to prices — A 5% change in zinc-lead prices would impact FY13 PAT by
6%. A 5% change in Rs/US$ rate would impact PAT by 7.5%.
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 and lead
capacity of 185ktpa and is 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 248tpa in FY12 and 327tpa 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 Sell/Low Risk (3L) with a target price of Rs136. HZL’s stock
has rallied 37% over the last year, in line with LME prices: zinc up 31%; lead 47%.
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 $2,275/t and lead $2,615/t. In FY13, we expect zinc LME to average
$2,538/t and lead $2,443/t. We expect a zinc surplus in 2011 and 2012 and expect
LME prices to remain range bound over 6-12 months. Longer term, however, a
potential shortage of mine supply looms in the second half of the decade, with a
deficit expected in 2014. Our Sell is based on our medium-term zinc outlook and full
valuations. There is further downside risk to FY13 PAT (14%) as HZL suffers the
biggest negative impact among non-ferrous stocks if the draft Mining Bill is passed
in its current form.
Valuation
We set our target price for HZL at Rs136, by applying a P/E of 10x to our estimate
of Sep12 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 in line with the 8-11x 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 Sep12
EV/EBITDA of 5.6x.
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 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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Zinc (HZNC.BO)
Downgrade to Sell: Not Enough Zing
Downgrade to Sell — HZL’s stock has rallied 37% over the last year, in line with LME
prices: zinc up 31%; lead 47%. We expect a zinc surplus in 2011 and 2012 and expect
LME prices to remain range-bound over 6-12 months. We cut estimates/TP marginally
and downgrade to Sell based on our zinc outlook and full valuations. There is further
downside risk to FY13 PAT (14%) as HZL suffers the biggest negative impact among
non-ferrous stocks if the draft Mining Bill is passed in its current form.
Estimates cut — We reduce FY12-13 PAT by 7% - 1) lower volumes: Zawar mines in
forest areas awaiting clearances, lead smelter delays; 2) higher costs based on FY11
actuals, coal price trends. The PAT cut is partly offset by higher other income and lower
tax rate. We cut TP to Rs136 and continue to value HZL at 10x PE (18-month avg.) but
roll forward to Sep12 (from Jun12). At our TP HZL would trade at 5.6x EV/EBITDA.
Zinc outlook — Zinc prices have recovered 13% in the past month on short covering.
Zinc can only add to recent gains if Chinese output is cut or global economic conditions
recover better than expected. Our commodities team feels zinc has the weakest nearterm fundamentals relative to the other metals. We estimate ~250kt surplus for 2011
and 2012. Longer term, a potential supply shortage looms, with a deficit in 2014.
1Q FY12 outperforms expectations — HZL’s PAT at Rs15bn (+68% yoy) came in
30% above Citi est. on higher zinc volumes, concentrate sales, higher other income
and lower tax rates. EBITDA margin (excl. other income) was 56% vs 51% in 1QFY11
and 60% in 4QFY11. Zinc + lead volumes grew 16%, zinc LME was up 11% and lead
31%. HZL benefited from high silver content in the surplus lead concentrate sold. There
was marginal production loss at Rampura Agucha due to a shutdown (unlikely to
impact full-year volumes).
Sensitivity to prices — A 5% change in zinc-lead prices would impact FY13 PAT by
6%. A 5% change in Rs/US$ rate would impact PAT by 7.5%.
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 and lead
capacity of 185ktpa and is 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 248tpa in FY12 and 327tpa 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 Sell/Low Risk (3L) with a target price of Rs136. HZL’s stock
has rallied 37% over the last year, in line with LME prices: zinc up 31%; lead 47%.
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 $2,275/t and lead $2,615/t. In FY13, we expect zinc LME to average
$2,538/t and lead $2,443/t. We expect a zinc surplus in 2011 and 2012 and expect
LME prices to remain range bound over 6-12 months. Longer term, however, a
potential shortage of mine supply looms in the second half of the decade, with a
deficit expected in 2014. Our Sell is based on our medium-term zinc outlook and full
valuations. There is further downside risk to FY13 PAT (14%) as HZL suffers the
biggest negative impact among non-ferrous stocks if the draft Mining Bill is passed
in its current form.
Valuation
We set our target price for HZL at Rs136, by applying a P/E of 10x to our estimate
of Sep12 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 in line with the 8-11x 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 Sep12
EV/EBITDA of 5.6x.
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 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.
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