hindustan zinc, Good show backed by higher LME…ADD:: says ICICI Securities,

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Good show backed by higher LME…
Hindustan Zinc (HZL) reported a good set of numbers for Q1FY11
beating our expectations. The topline came at ~Rs 2201 crore against
our expectation of ~Rs 1973 crore posting a YoY and QoQ growth of
21% and ~12%, respectively. This was on the back of a substantial rise
in average realisations due to higher LME prices. EBITDA margins
remained flat QoQ, falling by 70 bps. However, YoY it fell by 800 bps to
51.1% primarily due to a rise in coke and coal costs and higher stripping
costs. The bottomline grew 1.5% and 6.5% YoY and QoQ, respectively,
to ~Rs 949 crore compared to our estimate of Rs 838 crore. Despite
negative interest costs, higher depreciation dented the PAT margin both
QoQ and YoY. Expansion projects of the company are on track and
would help volume growth, going forward. With a stable LME price
assumption, we are revising up our target price to Rs 1280/share. We
are assigning an ADD rating to the stock.
􀂃 Rise in realisation, volume helps topline growth
A sharp fall in the US dollar helped base metals prices to see a
substantial jump in the past three or four months. On the back of
this, HZL’s realisations for zinc in Q2FY11 rose 3% and 8% QoQ and
YoY, respectively. Total zinc and lead sales volumes also rose by
25% and 6%, respectively, YoY and QoQ mainly due to 39,000
tonnes contribution from the newly commissioned 210 ktpa zinc
smelter at Dariba.
􀂃 Expansion projects on track
The company expects its 100 ktpa lead smelter to be commissioned
during Q3FY11E. At Sindesar Khurd, the new 1.5 mtpa mine is also
likely to start production during Q3FY11E. These would help the
company to see a good volume jump in FY12E.
Valuation
At the CMP of Rs 1233, the stock is discounting its FY12E EPS by 9.8x and
FY12E EV/EBITDA by 5.3x. Looking at global peers we feel the stock is
trading near its fair value zone. We have valued the stock at 5.5x FY12E
EV/EBITDA and arrived at a target price of Rs 1259/share. We are
assigning an ADD rating to the stock.