HZL - Q2FY13 Result Update - Centrum

Q2FY13 Result Update

Hindustan Zinc Ltd

Buy

Target Price: Rs159

CMP: Rs135

Upside: 17.7%

Higher mining output to drive growth ahead

Hindustan Zinc’s (HZL) Q2FY13 PAT was in line with our expectations at ~Rs15.4bn and was aided by lower tax rate of 15% and higher other income of Rs5.4bn (up by ~40% YoY). EBITDA stood at ~Rs14.4bn with lower margin of 51.1%, down by 160bps QoQ mainly on account of lower mining output, higher costs and depressed LME realizations. The company maintained its guidance on increased mine output in H2FY13E with volume growth in lead and silver divisions and strongly asserted flat cost of production (COP) for FY13E, implying significantly lower COP in H2FY13E. We have lowered our total zinc & lead volume estimates for FY13E/14E by 4.5%/3.2%. We revise upwards our EV/EBITDA valuation multiple for FY14E to 6x and revise our target upwards to Rs159. Maintain Buy.

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m  Volumes remain subdued except silver: Zinc volumes remained subdued with lower zinc mine output and stood at 1.62 lakh tonne, lower by ~12% YoY. Lead volumes were lower QoQ at 26000 tonne. Silver volumes were higher than expectations at 82 tonne, up by ~98% YoY and ~12% QoQ.

m  Margin drops but expected to recover sharply in H2FY13E: EBITDA dropped by ~1.5% YoY to Rs14.4bn and EBITDA margin stood at 51.1% as lower overall mine output resulted in lower integrated production in zinc, lead and silver. Also, pressure on LME realizations resulted in sharp margin drop YoY. Margins are expected to recover sharply in H2FY13E on account of higher volumes and better realizations.

m  Conference call highlights – Higher output and lower costs ahead: Tax rate was lower due to various tax optimization schemes and is expected to remain in mid teens going forward. Other income remained strong due to higher yields (9% after tax) on huge cash pile. Management has guided for higher mine output in H2FY13E and for flat production cost for FY13E, implying significantly lower costs for H2FY13E. Expansion at Kayar mine is progressing well with developmental ore produced already and mining at Rampura Agucha is expected to go underground by Q1FY14E with the cost of production maintained at ~US$320/tonne. For FY13E, zinc production is expected to remain flat to lower whereas lead would be higher resulting in marginally higher metal production. Silver production is expected at 350 tonne in FY13E. 

m  Earnings revised upwards for FY14E on lower tax: We have reduced our volume estimates for FY13E/14E by 4.5%/3.2% on account of delay in mining led growth. We continue to believe that HZL would see mining expansions led growth largely in FY14E from the starting of Kayar and Zawar mines. We remain conservative on LME assumptions for zinc and lead due to global uncertainty and maintain our assumptions for FY13E but revise it upwards for FY14E by marginal 1%. Our EBITDA and PAT for FY14E are revised downwards by ~2.1% and ~0.9% respectively. We now factor in 25% increase (earlier 50%) in royalty payouts for FY14E on account of new mining bill implementation as the same is getting delayed and no clarity exists as of now.

m  Valuations remain attractive, Reiterate Buy: We continue to like the stock due to the expected strong volume growth in lead and silver led by mining expansions, lower overall cost proposition, improvement in LME zinc and lead prices going forward and attractive valuations with favorable risk-reward. We now value the stock at 6x FY14E EV/EBITDA to factor in the high quality assets and strong earnings profile of the company. We revise our target upwards to Rs159. Maintain Buy.

Thanks & Regards, 

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