Hindustan Zinc- Upgrading to Outperform ::Macquarie Research,

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Hindustan Zinc
Upgrading to Outperform
Event
 Changes to forecasts: Our global commodities team has increased its
assumption on silver prices as it believes that silver prices will be maintained
at a relatively high level on the back of support for appetite for gold and
precious metals exposures in the current uncertain environment. We are
upgrading Hindustan Zinc to Outperform from Neutral and increase TP to
Rs149/ share.
Impact
 Changes to zinc, lead and silver price forecasts: Our global commodity
team have made very marginal changes to zinc and lead prices. However,
they have raised silver prices for FY12 by 28% to US$1,415/kg, for FY13 by
88% to $1,459/kg and FY14 by 62% to $1,102/kg.
 Global currency forecasts: Our economic team have also changed
USD/INR forecast from 44.3 to 46.3 for FY12, 43.2 to 45.8 for FY13 and 41.8
to 44.2 for FY14. These have also been built into our assumptions.
 Changing estimates: We have raised our earnings forecasts following
changes to our global team’s silver price assumptions. Also, changes to our
currency forecast estimates have helped earnings estimates. The company’s
new lead smelter and ramp up of SK mines will also help earnings in FY12.
 Searching for growth: One of the key concerns we have is lack of growth
visibility. Although the company is sitting on a substantial and growing pile of
cash, its growth options through an inorganic route have been restrained by
the Board. This leaves only an organic growth option, for which we think the
company has limited scope unless it makes a good-sized resource discovery.
It is running a detailed exploration programme, which can provide some
benefits in the long term.
Earnings and target price revision
 We raise our EPS estimates for FY3/12/13/14 by 2%, 12% and 9%,
respectively. Raise TP to Rs149 from Rs146.
Price catalyst
 12-month price target: Rs149.00 based on a PER methodology.
 Catalyst: Continued strength in silver prices and stable zinc prices
Action and recommendation
 Upgrade to Outperform: We have upgraded Hindustan Zinc to Outperform
as it has corrected by 25% from its peak which puts its assets in an attractive
zone as well as due to the increase in our earnings estimates. We raise our
target price on Hindustan Zinc to Rs149 on increased earnings.