Rating: Buy; Target Price: Rs160; CMP: Rs130; Upside: 23%
Volume disappoints, guidance cut again; maintain Buy
We remain positive on Hindustan Zinc (HZL) despite subdued Q3 results
and further cut in metal-in-concentrate (MIC) volume guidance to 0.9MT
for FY14E. We cut our metal volume estimates to factor lower mining
output but see limited adverse impact on EBITDA estimates (cut by ~3%
for FY15E) due to better LME prices and strong metal premiums coupled
with weak rupee mitigating the impact of lower volumes and increased
costs. Q3 results were lower than expectations operationally due to
sharp drop in lead & silver volumes as MIC production fell 5.6% YoY to
220kt. Risk reward remains favourable with current valuations at 3.2x
FY15E EV/EBITDA despite strong free cash flow. Maintain Buy.
$ Lower MIC output results in sharp fall in lead & silver volumes: MIC
production fell by 5.6% YoY to 220kt due to slow ramp up in
underground production at Rampura Agucha and Kayar mines. Zinc sales
volumes stood at 1.99 lakh tonne, up by ~17% YoY as integrated
production saw a jump of ~14.6%. Lead and silver sales volumes
suffered due to lower MIC and were down YoY by 20% & 30% respectively.
HZL has indicated that output from Rampura Agucha is expected to be
down 10% YoY in FY14E (with underground mining share of 10% vs 20%
expected earlier).
$ Margins supported by strong metal premiums and weak rupee: EBITDA
stood at Rs18.2bn (vs. est. Rs19.2bn) with margins at 52.9% (higher
than est. 52.5%) on the back of strong premiums on zinc & lead
(~US$250/t) and better realizations due to a weaker rupee mitigating
the negative impact of lower volumes and higher CoP. Other income was
lower due to the continuation of MTM loss (lower QoQ but is expected
to reverse over the year).
$ Guidance lowered, earnings revised downwards marginally: HZL reduced
its mined metal production guidance to 900kt and integrated silver
output to 290t. The reduction in guidance (since Q1) was surprisingly
high at 10% for mined metal output and ~20% for integrated silver and
the company indicated slow ramp up in underground mine production as
the main reason for this. We reduce our mined metal production
estimate to 900kt/940kt in FY14E/15E and cut our integrated metal
volumes for lead and silver. However, strong metal premiums, better
LME prices and weak rupee helped mitigate the adverse impact on EBITDA
and as a result we revise EBITDA estimates by 0.9%/-3.2% for
FY14E/15E.
$ Valuation & key risks: We continue to like HZL for its strong
fundamentals with volume growth led by mining expansion, lower overall
cost structure, structurally positive pricing scenario for zinc & lead
globally due to mining supply cuts and attractive valuations with
favorable risk-reward. Strong cash pile, high free cash flow
generation and low valuations at 3.2x FY15E EV/EBITDA, further
buttress our positive view on the stock. We value the stock at 4.5x
Dec’15E EV/EBITDA to arrive at our target of Rs160. Maintain Buy. Key
risks to our call are lower volumes and sharp fall in LME prices or
reversal in rupee.
Thanks & Regards
--
��
Volume disappoints, guidance cut again; maintain Buy
We remain positive on Hindustan Zinc (HZL) despite subdued Q3 results
and further cut in metal-in-concentrate (MIC) volume guidance to 0.9MT
for FY14E. We cut our metal volume estimates to factor lower mining
output but see limited adverse impact on EBITDA estimates (cut by ~3%
for FY15E) due to better LME prices and strong metal premiums coupled
with weak rupee mitigating the impact of lower volumes and increased
costs. Q3 results were lower than expectations operationally due to
sharp drop in lead & silver volumes as MIC production fell 5.6% YoY to
220kt. Risk reward remains favourable with current valuations at 3.2x
FY15E EV/EBITDA despite strong free cash flow. Maintain Buy.
$ Lower MIC output results in sharp fall in lead & silver volumes: MIC
production fell by 5.6% YoY to 220kt due to slow ramp up in
underground production at Rampura Agucha and Kayar mines. Zinc sales
volumes stood at 1.99 lakh tonne, up by ~17% YoY as integrated
production saw a jump of ~14.6%. Lead and silver sales volumes
suffered due to lower MIC and were down YoY by 20% & 30% respectively.
HZL has indicated that output from Rampura Agucha is expected to be
down 10% YoY in FY14E (with underground mining share of 10% vs 20%
expected earlier).
$ Margins supported by strong metal premiums and weak rupee: EBITDA
stood at Rs18.2bn (vs. est. Rs19.2bn) with margins at 52.9% (higher
than est. 52.5%) on the back of strong premiums on zinc & lead
(~US$250/t) and better realizations due to a weaker rupee mitigating
the negative impact of lower volumes and higher CoP. Other income was
lower due to the continuation of MTM loss (lower QoQ but is expected
to reverse over the year).
$ Guidance lowered, earnings revised downwards marginally: HZL reduced
its mined metal production guidance to 900kt and integrated silver
output to 290t. The reduction in guidance (since Q1) was surprisingly
high at 10% for mined metal output and ~20% for integrated silver and
the company indicated slow ramp up in underground mine production as
the main reason for this. We reduce our mined metal production
estimate to 900kt/940kt in FY14E/15E and cut our integrated metal
volumes for lead and silver. However, strong metal premiums, better
LME prices and weak rupee helped mitigate the adverse impact on EBITDA
and as a result we revise EBITDA estimates by 0.9%/-3.2% for
FY14E/15E.
$ Valuation & key risks: We continue to like HZL for its strong
fundamentals with volume growth led by mining expansion, lower overall
cost structure, structurally positive pricing scenario for zinc & lead
globally due to mining supply cuts and attractive valuations with
favorable risk-reward. Strong cash pile, high free cash flow
generation and low valuations at 3.2x FY15E EV/EBITDA, further
buttress our positive view on the stock. We value the stock at 4.5x
Dec’15E EV/EBITDA to arrive at our target of Rs160. Maintain Buy. Key
risks to our call are lower volumes and sharp fall in LME prices or
reversal in rupee.
Thanks & Regards
--
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