Hindustan Zinc :: ::Nomura research

Earnings momentum intact
Volumes to pick up from 2H,
strong silver ramp-up and cost
optimisation to drive earnings

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Action: Volumes to ramp-up from 2HFY13F, remain positive
We remain positive on Hindustan Zinc (HZ), in view of its strong earnings
visibility driven by volume ramp-up and cost optimisation. With silver rampup
as per schedule and zinc-lead volumes expected to pick up from
2HFY13F, we expect HZ to see strong earnings momentum. At the same
time, cash balances of INR226bn (INR54/share) should provide strong
support to valuations. We reaffirm Buy, with target price raised to INR157,
implying potential upside of 19% from current levels.
Catalyst: possible strong earnings in 2HFY13F; potential stake sale
by the government
Along with stable earnings in a difficult operating environment, the
potential sale of the government’s 29.5% stake to Sterlite Industries could
be a key trigger for the stock.
Valuation: We expect the strong performance to continue
We value HZ at 10x FY14F EPS of INR15.7. Although the stock has
rallied 15% over the past three months (outperforming the BSE metal
index by 13%), earnings estimates have also been revised upward by 3%
during this period. The stock is still trading at 8.4x FY14F P/E, which we
believe undermines HZ’s strong earnings visibility and cash support.
 We revise upward our FY13F/ FY14F earnings estimates by 6.8%/
11.1%, driven by: 1) lower royalty (earlier we expected the Mines And
Minerals Bill to be passed by FY13 – we are now building in higher
royalty from 2HFY14F; 2) higher other income, and; 3) a lower tax rate.


Volume ramp-up in 2H, earnings outlook
improves
We think HZ is one of the most defensive metal companies, both in terms of operational
performance and transparency of operations, among the Indian metal companies.
Currently, when most Indian metal companies are stuck with delayed projects, HZ has
continued to deliver on its promises of silver and lead volumes ramp-up, along with
steady performance in mined metal production.
This has also reflected in the stock performance, as HZ is one of the best-performing
metal stocks in India (up 15% over the past six months, outperforming the BSE metal
index by 13%), primarily on account of stable earnings and strong cash flows. We
estimate the stock still has 19% potential upside, given: 1) we expect that mined metal
volumes should pick up from 2HFY13F along with lower costs driven by higher-grade ore
body; and 2) silver volumes have ramped-up well and are on course to meet companyguidance
of a 400 tonnes per annum run-rate by end-FY13, in our view. Valuations
continue to be supported by cash and equivalents of INR226bn (INR54/share) expected
by end-FY13F.
We have revised our earnings estimates upward by 6.8% for FY13F and 11.1% for
FY14F largely on account of marginally higher zinc-lead volumes, higher other income
and a lower tax rate. We value HZ at 10x FY14F EPS of INR15.7 at INR157/share.
Earnings visibility has improved over the past six months
We believe HZ’s earnings visibility has largely improved since mid-June when we
upgraded the stock to Buy (“Strong fundamentals, earnings profile” dated June 19,
2012). We attribute this to: 1) silver volume ramp-up, which was faster than our
expectations 2) potential strong volume growth in 2HFY13 along with lower costs (better
than our expectations) and 3) likely surprise on non operating parameters such as lower
tax rate and higher other income.
We expect HZ’s earnings to grow 13.2% in FY13F and 5% in FY14F and EBITDA to
increase 2.8% and 8.4%, respectively. In our opinion, the reduced mined metal
production in 1H will have an impact on FY13F EBITDA growth, but we believe earnings
growth in FY13F will remain strong driven by 1) higher other income & 2) lower tax rate.
We expect earnings growth in FY14F to continue although we assume a higher tax rate
of 8% vs 16% in FY13F) and higher royalty (we expect royalty to double from 2HFY14 on
account of new mines and minerals bill being implemented). The key drivers for earnings
growth would be 1) higher mined metal production and 2) normalization of costs.


Revise target price to INR157, maintain Buy
We have revised our target price to INR157 (from INR141 earlier), driven primarily by our
11.1% upward revision in FY14 EPS to INR15.7. We continue to value the company at
10x FY14F EPS. We estimate HZ will have cash and equivalents at INR226bn i.e.
INR54/share which would be close to 34% of total value.