Hindustan Zinc:: Centrum

Superior operational show; maintain Buy
We maintain buy on Hindustan Zinc (HZL) with a target price of Rs161 on the back
of i)strong metal premiums and higher integrated output coupled with weak rupee
aiding realizations ii)marginal upward revision in EBITDA estimates for FY14E/15E
by 2.2%/3.4%, and iii) favourable risk-reward. Q2 results were better than
expectations operationally with margins at 52.9%, driven mainly by higher
integrated volumes, strong metal premiums, lower costs and a weak rupee.
Despite reduction in volume guidance to 950kt MIC zinc-lead production in FY14E,
we don’t see material change in our volume estimates due to strong H1. We prefer
HZL as our top pick in the non-ferrous group on strong fundamentals and
undemanding valuations.

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Robust volume performance with higher integrated output: MIC production
went up by ~17% YoY to 222kt and integrated volume share stood at 100% in zinc,
97% in lead and ~92% in silver. Zinc volumes stood at 1.96 lakh tonne, up by ~21%
YoY and 14% QoQ as integrated production saw a jump of ~28%. Lead and silver
sales volumes also showed smart uptick and were up YoY by 19% & 11%
respectively. Focus remains on maximising refined metal sales volumes with
minimum dependence on imported concentrates.
Margins improve supported by strong metal premiums and weak rupee:
EBITDA stood at Rs18.8bn (vs. est. Rs18.4bn) with margins at 52.9% (higher than est.
51.7%) on the back of higher integrated volumes, lower costs from operational
efficiencies, strong premiums on zinc & lead (~US$250/t) and better realizations due
to a weaker rupee. Silver volumes and realizations were largely muted. Other
income was lower due to Rs3bn MTM loss from a spike in long term interest rates
but is expected to reverse over the course of the year.
Guidance lowered, earnings revised upwards marginally: HZL has reduced its
mined metal production guidance by 5% to 950kt and integrated silver output to
335t (vs. 360t earlier). The reduction in guidance was surprising since H1 operational
performance was sound, but it does not lead to material revision in our estimates.
We marginally reduce our mined metal production estimate to 940kt/990kt in
FY14E/15E; and quick commercialization of Kayar mine could provide upside. With
estimates of integrated metal sales volumes remaining intact, EBITDA/PAT for FY14E
are revised upwards by ~2.2%/ ~1.9%, as we factor in higher metal premiums.
Reiterate top pick: Despite the recent outperformance, we continue to like HZL for
its expected strong volume growth led by mining expansion, lower overall cost
structure and attractive valuations with favorable risk-reward. Strong cash pile, high
cash flow generation and low valuations at 3.4x FY15E EV/EBITDA, further buttress
our positive view on the stock. We value the stock at 4.5x Sep’15E EV/EBITDA to
arrive at our target of Rs161.