Back to its Core
HZL in its FY13 annual report has chalked out plans for its next phase of
expansion. HZL’s growth in the near term would come from raising its mined
metal output from the current capacity of 0.87mtpa to 1.2mtpa over the next
six years. The company continues to remain focussed on increasing in
reserves and resources, thereby keeping the mine life above 25 years at
current capacity. HZL has guided for 1mn tons of mined metal production for
FY14 on the back of higher contribution from Zawar mines. The company has
managed to receive all the approvals for the operations of Zawar and expects
it to increase production from 0.2mtpa to 1.2mtpa in FY14. Costs are
expected to improve as coal costs decrease and mined metal output
increases. HZL continues to be our top bet amongst the non‐ferrous
companies. We maintain our BUY recommendation on the stock with a
revised 9‐month price target of Rs130.
Mined metal output to jump in FY14E
HZL’s mined metal output was impacted in H1 FY13 due to the process of
transforming its largest mine, Rampura Agucha, from open cast to
underground. Output in H1 FY13 was lower by 5.3% yoy and was in line with
the management guidance of weak output in the first half. However, it
managed to ramp up its output in H2 FY13 by 14.1% yoy, offsetting the
decline in volumes in the first half. The management has now guided for
mined metal output to increase from 0.87mn tons in FY13 to 1mtpa in FY14
on the back of higher contribution from Zawar and Sindesar Khurd mines. We
believe that the guidance given by the management is aggressive and expect
output to jump to 0.92mn tons in FY14 and 0.95mn tons in FY15.
Cash costs to decline marginally in FY14E
HZL’s cost of production in Rupee terms was higher by 13.7% yoy in FY13 due
to purchase of external concentrate, increase in diesel prices and lower strip
ratio. We believe that costs would decline in FY14 on account of increase in
captive mined metal, lower coal costs and improvement in strip ratios. Power
costs per ton declined in FY13 and are expected to decline further in FY14 due
to lower international coal prices. Raw material cost too is expected to
decline 25% yoy due to lower external purchase of concentrate.
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HZL in its FY13 annual report has chalked out plans for its next phase of
expansion. HZL’s growth in the near term would come from raising its mined
metal output from the current capacity of 0.87mtpa to 1.2mtpa over the next
six years. The company continues to remain focussed on increasing in
reserves and resources, thereby keeping the mine life above 25 years at
current capacity. HZL has guided for 1mn tons of mined metal production for
FY14 on the back of higher contribution from Zawar mines. The company has
managed to receive all the approvals for the operations of Zawar and expects
it to increase production from 0.2mtpa to 1.2mtpa in FY14. Costs are
expected to improve as coal costs decrease and mined metal output
increases. HZL continues to be our top bet amongst the non‐ferrous
companies. We maintain our BUY recommendation on the stock with a
revised 9‐month price target of Rs130.
Mined metal output to jump in FY14E
HZL’s mined metal output was impacted in H1 FY13 due to the process of
transforming its largest mine, Rampura Agucha, from open cast to
underground. Output in H1 FY13 was lower by 5.3% yoy and was in line with
the management guidance of weak output in the first half. However, it
managed to ramp up its output in H2 FY13 by 14.1% yoy, offsetting the
decline in volumes in the first half. The management has now guided for
mined metal output to increase from 0.87mn tons in FY13 to 1mtpa in FY14
on the back of higher contribution from Zawar and Sindesar Khurd mines. We
believe that the guidance given by the management is aggressive and expect
output to jump to 0.92mn tons in FY14 and 0.95mn tons in FY15.
Cash costs to decline marginally in FY14E
HZL’s cost of production in Rupee terms was higher by 13.7% yoy in FY13 due
to purchase of external concentrate, increase in diesel prices and lower strip
ratio. We believe that costs would decline in FY14 on account of increase in
captive mined metal, lower coal costs and improvement in strip ratios. Power
costs per ton declined in FY13 and are expected to decline further in FY14 due
to lower international coal prices. Raw material cost too is expected to
decline 25% yoy due to lower external purchase of concentrate.
Higher volumes to boost earnings
HZL’s earnings growth has been subdued over the last two years on account of
lower mined metal output and subdued metal prices. After registering a dismal
H1 FY13, the company has managed to recover volumes in H2 FY13. We believe
the recovery would continue in FY14 wherein the company expects mined
metal output to increase 15% yoy. We believe over the next two years earnings
growth for the company would be led by higher volumes from the new lead
smelter and mined metal output. We expect metals prices to remain subdued
in FY14 as excess capacity and high inventory would cap the upside. We have
upgraded our refined metal production in FY14 on the back of higher mined
metal output. A revision in our Rupee/Dollar assumption has also led to some
upgrade in earnings for FY14 and FY15. However, this impact has been offset
by lower silver sales volume and lower realisation. At the CMP of 98, the stock
is trading at 5.8x P/E and 2x EV/EBIDTA on FY14E, which is lower than the
range its international peers. We maintain our BUY recommendation on the
stock with a revised 9‐month price target of Rs130.
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