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Hindustan Zinc-----------------------------------------------------------------Maintain OUTPERFORM
"Real" Zn price already weak; upside ahead
● We have cut our Zn forecasts due to the weakness in demand
arising from (1) Medium-term slowdown in China with severe
impact on auto demand; (2) Decline in US auto production from
Japan supply chain constraints, and (3) Rising inventory levels.
● That said, we expect the market to start to improve as demand
momentum picks up in 2HCY11. We expect Zn to continue close
to its current spot levels in CY11.
● It is noteworthy that despite very weak demand-supply
fundamentals, Zn has held up well. This is largely as most major
currencies are depreciating – a simple chart of Zn vs. Gold
indicates the ‘real’ fall in Zn. Given it has already been weak, we
expect upside from here in USD terms (Fig 2).
● However, we maintain our price target as silver prices are now
stronger, and as we roll forward one quarter.
● We maintain OUTPERFORM as (1) we forecast EBITDA to rise
~35% CAGR over FY11-13; and (2) Strong free cash flow
generation (10.6% yield in FY12, i.e. on current LME) will continue
to add to value of HZL (Fig 3).
Near term slowdown in Zinc, recovery underway
We have revised down our Zn forecasts due to the weakness in
demand arising from (1) Medium-term slowdown in China with severe
impact on auto demand; (2) Decline in US auto production due to
Japanese supply chain constraints, and (3) Rising inventory levels
That said we expect the market to start to improve as demand
momentum picks up in 2HCY11. We expect Zn to continue close to its
current spot levels in CY11. It is noteworthy that despite very weak
demand-supply fundamentals, Zn has held up well. This is largely as
most major currencies are depreciating – a simple chart of Zn vs. Gold
shows the ‘real’ fall in Zn. Given that it has already been weak, we
expect upside from here in USD terms (Fig 2). With any supply shocks
and faster recovery, our estimates could have an upside risk.
This boost in USD-based prices comes not from mere financial
involvement in LME trading, but from the fact that costs are rising
across the board due to depreciation in most major currencies,
inflating the cost curve, and thereby supporting higher LME Zn prices.
Holding real assets in such an environment is therefore advisable, and
HZL is a good proxy, being a low cost producer with rising silver
output and a sturdy balance sheet.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Zinc-----------------------------------------------------------------Maintain OUTPERFORM
"Real" Zn price already weak; upside ahead
● We have cut our Zn forecasts due to the weakness in demand
arising from (1) Medium-term slowdown in China with severe
impact on auto demand; (2) Decline in US auto production from
Japan supply chain constraints, and (3) Rising inventory levels.
● That said, we expect the market to start to improve as demand
momentum picks up in 2HCY11. We expect Zn to continue close
to its current spot levels in CY11.
● It is noteworthy that despite very weak demand-supply
fundamentals, Zn has held up well. This is largely as most major
currencies are depreciating – a simple chart of Zn vs. Gold
indicates the ‘real’ fall in Zn. Given it has already been weak, we
expect upside from here in USD terms (Fig 2).
● However, we maintain our price target as silver prices are now
stronger, and as we roll forward one quarter.
● We maintain OUTPERFORM as (1) we forecast EBITDA to rise
~35% CAGR over FY11-13; and (2) Strong free cash flow
generation (10.6% yield in FY12, i.e. on current LME) will continue
to add to value of HZL (Fig 3).
Near term slowdown in Zinc, recovery underway
We have revised down our Zn forecasts due to the weakness in
demand arising from (1) Medium-term slowdown in China with severe
impact on auto demand; (2) Decline in US auto production due to
Japanese supply chain constraints, and (3) Rising inventory levels
That said we expect the market to start to improve as demand
momentum picks up in 2HCY11. We expect Zn to continue close to its
current spot levels in CY11. It is noteworthy that despite very weak
demand-supply fundamentals, Zn has held up well. This is largely as
most major currencies are depreciating – a simple chart of Zn vs. Gold
shows the ‘real’ fall in Zn. Given that it has already been weak, we
expect upside from here in USD terms (Fig 2). With any supply shocks
and faster recovery, our estimates could have an upside risk.
This boost in USD-based prices comes not from mere financial
involvement in LME trading, but from the fact that costs are rising
across the board due to depreciation in most major currencies,
inflating the cost curve, and thereby supporting higher LME Zn prices.
Holding real assets in such an environment is therefore advisable, and
HZL is a good proxy, being a low cost producer with rising silver
output and a sturdy balance sheet.
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