Hindustan Zinc - Marginal impact of Vizag smelter shutdown; company update; Buy :: Edelweiss PDF link

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Hindustan Zinc (HZ IN, INR 128, Buy)

Hindustan Zinc (HZL) has suspended production at its Vizag zinc smelter (56 ktpa) since mid February 2012 due to high smelting cost. Vizag operations are unlikely to restart owing to the recent increase in rail freight and unviable custom smelting at this old plant. The company intends to install roasters at Dariba (to begin with) and other smelting units, which will enhance their production by ~20kt each and also make up for production loss at Vizag. We have reduced our FY13 and FY14 zinc production estimates by ~3% each, leading to EPS cut of ~3% for both FY13 and FY14. Maintain‘BUY’ with revised target price of INR146/share.

Operations at Vizag suspended since mid Feb’12

HZL has suspended production at its Vizag zinc smelter (56ktpa) since mid Feb’12 due to higher smelting cost (USD 700/t vs USD 500/t for the company). The recently announced increase in railway freight by >20% has come in as a final nail in the coffin for the closure of this unit. Capacity utilisation at this facility was already low at ~70% in FY11 and ~53% in FY12. The company doesn’t intent to restart the smelter, as custom smelting will not be profitable at thisold plant. 

Dariba unit to make up for Vizag production loss

HZL aims to make-up for the loss of production at Vizag by installing new roaster at Dariba which will enhance production of units by ~20kt. The company intends to install similar roasters near each smelter, going forward.

Outlook and valuations: Positive; maintain ‘BUY/SO’

We have cut down our FY13 and FY14 zinc production estimates by ~3% each, reducing our EPS estimates by ~3% for both FY13 and FY14. Hence, EPS of Sterlite Industries is also estimated to be revised down by ~2% each for FY13 and FY14. We maintain BUY/SO with revised TP INR146/share (INR150 earlier). The stock currently trades at 4.8x FY13E EV/EBITDA.

Hindustan Zinc - Marginal impact of Vizag smelter shutdown; company update; Buy

Regards,