Hindustan Zinc (HZ IN, INR 125, Buy)
We recently met the Hindustan Zinc (HZL) management. Key takeaways are: (a) underground mining likely to commence by Q2-Q3FY13 at Rampura Agucha with no major cost increase; (b) FY13 capex guidance of INR15bn-18bn remains intact; and (c) effective tax rate to decline. We believe HZL will not be able to make up for lower volumes in H1FY13 (in contrast to its guidance) and cut our FY13E zinc volume 6.5%, leading to 5.6% cut in our FY13E EBITDA. While our FY14E EBITDA and TP are broadly unchanged, we downgrade our rating from ‘Sector Outperformer’ to ’Sector Performer’ due to lower volumes in FY13. Maintain ‘BUY’.
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Underground mining at Rampura Agucha to start in Q2-Q3FY13
Underground mining at Rampura Agucha is likely to begin soon with trial excavation likely to commence in coming months. The underground portion will ramp up in FY14 with estimated volume of ~1.0-1.5mt (total mine capacity 6mtpa). The share of underground mining will ramp up gradually and by FY18 end, the entire mine is expected to go underground. With the mine’s current strip ratio at peak, HZL does not expect the underground mining cost to increase materially (current cost ~USD300/t).
Cutting FY13 and FY14 zinc volume estimates
HZL has guided for lower volumes in H1FY13 YoY due to Rampura Agucha’s higher strip ratio. But, it is confident that FY13 volume will be flat YoY on expectation of recovery in H2FY13. We, however, believe that it will be difficult for HZL to recover volumes in H2 and are hence lowering our zinc volume estimates 6.5% for FY13 and 2.7% for FY14. In Q1FY13, zinc volumes are expected to be 17% lower YoY and flat QoQ in Q2FY13.
Outlook and valuations: Positive; maintain ‘BUY’
Led by the cut in volumes, our FY13E EBITDA is down 5.6%. However, due to higher other income and lower tax rate, PAT decline is just 1.5%. FY14E earnings remain largely unchanged. We are lowering our target price to INR144 (from INR146) and also downgrading our rating from ’Sector Outperformer’ to ’Sector Performer’ due to lower volumes in FY13. Maintain ‘BUY’.
Regards,
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