Hindustan Zinc - Accumulate -2QFY2011 Result Update:: Angel Broking

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Hindustan Zinc - Accumulate -2QFY2011 Result Update
Hindustan Zinc (HZL) reported net revenue of `2,163cr in
2QFY2011, marginally higher-than-our-estimate of `2,049cr.
However, net profit at `949cr was in line with our estimate of
`966cr.
Top-line growth on the back of higher volumes and prices:
During 2QFY2011, HZL's mined zinc production was higher
by 6.4% yoy and 12.6% qoq to 204,836 tonnes, as water
shortage that affected its production in 1QFY2011 was absent
and the new smelter is ramping up gradually. Zinc metal sales
volume grew by 24.4% yoy and 6.6% qoq to 175,309 tonnes
on account of the commissioning of the 210ktpa zinc smelter
at Rajpura Dariba in 4QFY2010, which produced ~39,000
tonnes in 2QFY2011. Lead metal sales volume increased by
27.0% yoy and 2.7% qoq to 14,458 tonnes during 2QFY2011.
During the quarter, zinc and lead realisations increased by
16.1% yoy to US $2,238/tonne and by 10.0% yoy to
US $2,338/tonne, respectively. In addition, saleable silver
production increased by 17.0% yoy to 35,341kg (30,324 kg),
while sales increased by 25.8% yoy to 36,879kg (29,326kg).
Average silver realisation increased by 35.6% yoy to
US $653/kg (US $482/kg). Thus, net revenue increased by
20.9% yoy to `2,163cr.
Operating performance remains muted: EBITDA grew by 4.6%
yoy to `1,125cr as margins dipped by 807bp yoy to 52.0%
(lower than our estimate of 54.2%) on account of a) higher
stripping costs at mines resulting in a 29.7% yoy increase in
mining expenses to `206cr, b) 90% yoy increase in stores and
spares cost to `227cr and c) 46.8% yoy increase in power costs
to `260cr on account of higher coal cost. Despite other income
increasing by 19.7% yoy to `184cr, net profit grew by only
1.5% yoy to `949cr on account of higher depreciation expense,
which increased by 50.2% to `116cr.

Expansion projects
􀂄 The 100ktpa lead smelter at Rajpura Dariba is delayed by
a quarter and is expected to be commissioned by 3QFY2011E.
􀂄 The Sindesar Khurd mine project is also delayed by a
quarter and production is expected to commence from
3QFY2011E.
Outlook and valuation
At `1,227, the stock is trading at 7.7x FY2011E and 5.2x
FY2012E EV/EBITDA. HZL is expected to benefit from the
expansion of zinc-lead smelting capacity and increased silver
production. Further, HZL had a huge cash balance of `12,213cr
at the end of the quarter (`289 per share). We recommend
Accumulate on the stock with a revised Target Price of `1,342
(earlier `1,227), valuing the stock at 6.0x FY2012E EV/EBITDA.