Hindustan Zinc Ltd – BUY ‘Silver to add shine':: IIFL

Hindustan Zinc Ltd (HZL) in its FY12 annual report highlights
the expansion in its product making capacities, the accretion in
reserves and its initiative towards green energy. In FY12, HZL
managed to commission its 0.1mtpa lead smelter, 350tpa silver
refinery and ramped up its mining capacity at Sindesar Khurd
to 2mtpa. However during the year, grade of zinc metal in
concentrate declined sharply from 13.09% to 11.98% at the
Rampura Agucha mine (accounts for 88% of total mined
metal). With the commissioning of the Phase II wind power
projects, it has become one of India’s largest green energy
producers. HZL is trading at its lower band (3.4x FY13
EV/EBIDTA), which we believe is a good entry point. We
maintain our BUY rating on the stock with a revised 9-month
price target of Rs137.

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Costs to stay higher: Rising power costs & falling metal grades
HZL’s Cost of Production (CoP) has been on the rise over the last few
years on account of increase in royalty, rising power costs and an
increase in its strip ratio. We believe this would continue going ahead
as Coal India has raised prices for non-power consumers and the strip
ratio at Rampura Agucha is expected to remain high. However, the
management expects the strip ratio to decline from H2 FY13. The
impact of increase in costs would be offset by the jump in revenue
from sale of silver. We expect OPM to expand 360bps yoy in FY13 to
56.8% from 53.2% in FY12.
Valuations attractive; Silver to drive earnings
HZL over the last six months has commissioned the 0.1mtpa lead
smelter in Dariba, the 350tpa silver refinery in Pant Nagar and has
ramped-up of the SK mine from 1.5mtpa to 2.0mtpa. We believe this
would play a pivotal role for the company over FY12-14E. We expect
zinc and lead prices to stay subdued over the next two years as the
market remains in an oversupply mode. However, the strength in the
silver prices would boost margins for the company. HZL has been
trading at a one year forward EV/EBITDA in the range of 3-8x for the
past five years (Average one year forward EV/EBIDTA of 4.6x). We
have taken a marginally lower multiple of 4.5x for our valuation, which
is in line with the current weakness in the zinc cycle and sluggishness
in demand. We maintain our BUY rating on the stock with a revised 9-
month price target of Rs137.


Valuations attractive; Silver to drive earnings
HZL over the last six months has commissioned the 0.1mtpa lead
smelter in Dariba, the 350tpa silver refinery in Pant Nagar and has
ramped-up of the SK mine from 1.5mtpa to 2.0mtpa. We believe this
would play a pivotal role in volume expansion for the company over
FY12-14E. We expect zinc and lead prices to stay subdued over the
next two years as the market remains in an oversupply mode.
However, the strength in the silver prices would boost margins for the
company. HZL has been trading at a one year forward EV/EBITDA in
the range of 3-8x for the past five years (Average one year forward
EV/EBIDTA of 4.6x). We have taken a marginally lower multiple of
4.5x for our valuation, which is in line with the current weakness in the
zinc cycle and weakness in demand. We maintain our BUY rating on
the stock with a revised 9-month price target of Rs137.