Hindustan Zinc BUY-- Huge reserve base; provides strong earnings visibility :: ICICI Securities, PDF link

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Huge reserve base; provides strong earnings visibility
HZL is the leading miner & manufacturer of zinc and lead in India. Zinc
metal is primarily used in galvanising steel (~50%), which is further used
in the automobile & consumer goods industry while lead is primarily used
in manufacturing automobile batteries (~80%). The company has a huge
reserve base, which provides strong earnings visibility. In FY14, there was
a gross addition of 26.1 MT to reserves and resources, prior to a
depletion of 9.3 MT. Total reserves and resources (R&R) as of March 31,
2014 were 365.1 MT containing 35.2 MT of zinc-lead metal and 28804
tonnes of silver. The overall mine life continues to be 25+ years.
Low cost advantage aids in sustaining superior operating margins
HZL’s smelting assets are in the lowest quartile on the global cost curve.
The low cost advantage is attributable to its fully integrated nature of
operations involving mines, smelter and captive power plants.
Furthermore, HZL’s smelters are logistically well placed in Rajasthan, near
its mines, which results in low transportation and shifting costs. Hence,
low cost of operations help the company in consistently maintaining
healthy EBITDA margins.
Robust zinc & lead outlook
As per the International Lead & Zinc Study Group (ILZSG), in CY13, total
lead metal production & consumption stood at 12.9 million tonne (MT)
and 13.0 MT. Production & consumption of zinc stood at 11.2 MT. We
expect zinc prices to remain upbeat on the back of robust metal demand
amid closure of some large zinc metal mines globally. On the lead front,
the price is expected to be robust on the back of good metal demand
from the automobile sector in both developing and developed countries.
Stable business model, robust balance sheet; recommend BUY
HZL’s integrated business model ensures steady cash flows, which
reiterates our positive stance on the company. Furthermore, HZL has a
robust balance sheet and healthy liquidity position with cash and cash
equivalents of | 27,475 crore as on September 30, 2014 (cash per share of
~| 65/share, ~40% of market cap). We have valued the stock at 5.5x
FY16E EV/EBITDA. We have arrived at a target price of | 185 with a BUY
recommendation on HZL.

LINK
http://content.icicidirect.com/mailimages/IDirect_HindustanZinc_Q2FY15.pdf