Hindustan Zinc: TP: INR183 Buy: Motilal Oswal

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Silver boosts RoIC
Re-investment strategy unclear
 Strong silver volume growth to boost HZ's RoIC.
 RoCE will keep declining due to a rise in un-invested capital in total capital
employed.
 Higher dividend payout can re-rate stock. Maintain Buy.
Strong volume growth of silver to boost RoIC
We expect Hindustan Zinc (HZ) to post volume CAGR of 6% to 808k tons over
FY11-13 due to planned capacity addition from 212ktpa (since Sterlite's acquisition in
April 2002) to 964ktpa in FY11. It commissioned a 100ktpa lead smelter in Dariba in
2QFY12, which will drive lead and silver production volumes. Production at the silverrich
Sindesur Kurd (SK) mine is being ramped up to gain maximum potential when
metal prices are touching peaks. We expect the mine to produce up to 1.5mt in FY12
and up to 2mt in FY13.
We expect silver to post volume CAGR of 77% to 460 tons over FY11-13 and lead to
post volume CAGR of 56% to 140k tons. Thus lead and silver will enhance their share
in total revenue from the existing 12% to almost 30%.
Invested capital share to decline, put pressure on RoCE
With increasing production of silver, RoIC is expected to jump from 74% in FY11 to
97% in FY13. Once the ongoing expansion is complete, invested capital will decline
and other income will increase, putting pressure on RoCE and RoE over FY11-13.
After the completion of an ambitious capacity addition over the past eight years, the
management is contemplating efficient resource allocation. Over FY11-13, HZ will
generate USD3.4b operating cash flow, which will have to be invested in high margin
core businesses to generate higher returns. Alternatively, the management could make
a higher dividend payout.


Valuations
HZ will post earnings CAGR of 13% over FY11-13 due to higher metal production. HZ
has a lean cost structure (CoP including royalties of ~USD1,000/ton) and strong volume
growth in lead and silver will drive earnings growth. A rising share of silver in EBITDA
will drive RoIC but RoCE will keep declining due to a falling share of invested capital in
the core business. A higher dividend payout can re-rate the stock. Maintain Buy.

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Metals and Mining, RoIC v/s RoCE: The Return Roulette :: Motilal Oswal