Hindustan Zinc- Two pluses, one minus :Macquarie Research,

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Hindustan Zinc
Two pluses, one minus
Event
 Hindustan Zinc (HZ) reported 2Q FY12 earnings that were 6% below our
estimate, driven by lower refined sales volume. We believe that Hindustan
Zinc’s low cost structure, strong balance sheet and increased capacities will
help its earnings and clarity on future growth projects, and thus will help in rerating.
The stock looks attractively valued, although there could be pressure
on near-term earnings due to decline in LME prices. Maintain Outperform.
Impact
 Strong growth due to capacity expansion bearing fruit: Net sales at
Rs25.9bn for 2Q FY12 grew by 20% YoY but were down 8% QoQ, as refined
zinc sales volume declined 4% QoQ. EBITDA was Rs14.2bn, up 31% YoY
but down 9% QoQ, resulting in an EBITDA margin of 55%. Reported net profit
grew 39% to Rs13.5bn in 2Q, compared with Rs14.9bn the previous quarter.
 Dividend policy change: Hindustan Zinc has announced a departure from its
progressive dividend policy tied to a % of profits and has announced an
Rs1.5/share interim dividend to reward shareholders. The company is
confident of generating enough cash to fund future growth projects.
 Growth is the key: One of our key concerns has been a lack of growth
visibility. The company is in the process of starting its Kayar mines in 1QFY14
with a capacity of 0.5tmt. It is also running a detailed exploration programme,
which could provide some benefits in the long term. We believe that a
capacity expansion plan would be a key to re-rating.
 Consensus earnings have little downside: Street is estimating earnings at
Rs14.2/share for FY12; however, even at current zinc and lead spot prices,
we believe the company should be able to deliver Rs14.6/share for FY12.
Also, our commodity team believes that downside risk to the zinc price should
be limited in the medium term by ongoing demand growth, emerging tightness
in the market for zinc concentrates, and cost support.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs149.00 based on a PER methodology.
 Catalyst: New capacities contributing to earnings
Action and recommendation
 Maintain Outperform: After the stock has corrected by 30% from its peak in
April 2011, the shares look attractively valued. We believe that the ramp-up of
its lead smelter and silver refinery next quarter as well as clarity on future
projects could lead to rerating. Maintain Outperform.