Mining expansions to provide volume fillip
Hindustan Zinc’s (HZL) Q4FY13 earnings were well ahead of our estimates on the back of higher concentrate sales, better integrated metal volumes and lower tax rate. EBITDA stood at ~Rs21.2bn with higher than expected margin of 55%, driven by strong metal-in-concentrate (MIC) production (up 16.6% YoY at 260kt) and zinc concentrate sales of 61kt. The company gave a strong guidance of 1 MT MIC zinc-lead production in FY14E, up 15% from 870 kt in FY13. We have lowered our EBITDA estimates on account of a cut in realization assumptions. Maintain Buy on strong fundamentals and cheap valuations (currently trading at 3.5x FY14E EV/EBITDA).
Higher concentrate sales surprises positively along with integrated metal volumes: Integrated volume share stood at 100% in zinc, 90% in lead and ~85% in silver and was a positive surprise. Zinc volumes remained at 1.8 lakh tonne, lower by ~4% YoY but surplus zinc concentrate sales stood at 61kt leading to smart growth in zinc sales. Lead volumes stood at 32.5kt, up QoQ by 8.3%. Silver volumes stood at 107 tonne, up by ~40% YoY. MIC production went up smartly to 260kt, up ~12% QoQ and 16.6% YoY.
Strong margins: EBITDA margin improved by 140bps YoY and stood at 55% on the back of surplus concentrate sales and higher integrated production in zinc, lead and silver. We however do not expect margins to sustain at Q4 level but settle down lower on account of lower realizations going ahead.
Conference call highlights – Higher MIC output and stable costs ahead: Company has guided for 1 MT of MIC output in FY14E (up by 15% YoY) backed by 60kt MIC output from 1.2 mtpa Zawar mines (all approvals received and work has started), 30kt MIC output from 0.35 mtpa Kayar mine and increase in SK mine ore production from 1.6 mtpa to 2mtpa. Integrated silver production is expected to be ~360 tonne in FY14E. Cost of production is expected to remain stable due to operational efficiencies and high mechanization. Tax rate was lower in FY13 at 11.8% due to benefit on silver refinery ramp-up and wind mils along with various tax optimization schemes and is expected to remain in mid teens during FY14-15E. Depreciation expense had a one-off write back of Rs560mn during Q4. Reserves & Resources (R&R) stood at ~350 MT after net addition of ~16 MT during FY13, implying a mine life of 25+ years.
Earnings revised downwards on lower LME prices: We maintain our mined metal production estimate of 957kt/1005kt in FY14E/15E as we continue to believe that HZL will see mining expansion-led growth from the starting of Kayar and Zawar mines. We expect integrated metal sales volumes of 747kt/125kt for zinc/lead in FY14E, implying strong double digit YoY growth of 13%/17% respectively. We remain conservative on LME assumptions for zinc and lead due to global uncertainty and revise it downwards by 3-8% for FY14-15E. Our EBITDA and PAT for FY14E are revised downwards by ~7% and ~5% respectively on account of lower realizations.
Valuations remain attractive, Reiterate Buy: We continue to like the stock due to the expected strong volume growth led by mining expansions, lower overall cost proposition and attractive valuations with favorable risk-reward. Possible stake sale by the government at a significant premium will remain the other positive trigger for minority shareholders and the possibility of the same is high in FY14E in our view. We value the stock at 5.5x FY15E EV/EBITDA to arrive at a fair value of Rs159. Maintain Buy.
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