PL INDIA: Hindustan Zinc - Beaten down valuations and strong FCF sets the positive tone - Accumulate

PL INDIA 

Hindustan Zinc                   Accumulate             

Visit Update - Beaten down valuations and strong FCF sets the positive tone

We met the top management of Hindustan Zinc (HZL) to understand the status of underground (UG) projects in Rampura Agucha (RA) and Sindesar Khurd (SK) mines, guidance on capex and volumes. Following were the key highlights of the interaction:

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n  Production to commence in August at Rampura Agucha (RA) UG operations: Management highlighted that project team touched 340 metre depth and expects to touch ore body in August 12. Management expects UG operations to contribute 1m tonnes in FY14. The operations would contribute 4.5mtpa at its peak capacity, likely in FY18/19, when its vertical shaft would become operational. Management guided for CoP in the range of US$300-310/tonne, in line with US$300/tonne in existing open cast (OC) operations.

n  Expect resumption of closed mines in Zawar during Q3FY12: Management expects to get the renewal of mining lease for Mochia, Zawarmala and Baroi leases in Zawar during Q2FY12, substantiated by state government’s favorable recommendations to honourable Supreme Court stating that these leases are not part of Aravali valley. Management expects 45-50k tonnes of incremental lead production, provided these mines resume in Q3FY12.

n  Capex guidance of Rs15-20bn in FY13: Management guided for capex of Rs15-20bn in FY13 which includes sustenance capex of Rs3.5bn. Growth capex would primarily be focussed on UG projects in RA, Sindesar Khurd (SK), Kayar and 5^th Roaster of 170ktpa at Dariba. Company has already ordered two vertical shafts of 4.5mtpa each for RA and SK mine at total outlay of Rs30bn.

n  Valuation and Outlook: Stock’s valuations de-rated post February, largely on account of structural upward shift in CoP due to transition of RA’s OC operations to UG, strong possibility of government’s stake buy-out at lower levels, elevated capital spending in RA and falling ore grades. Neverthless, attractive valuations (EV/EBITDA-4.5x FY13E) and strong free cash flow generation of Rs34-35bn p.a presents a strong case for our positive outlook on the stock. We maintain ‘Accumulate’ rating with TP of Rs134, EV/EBITDA of 5.5x FY13E.